Affiliate nexus, California and Amazon - the saga and oddities continue

A few unusual things have occurred since California enacted its "Amazon" - affiliate nexus law (ABX1 28; Chapter 7) at the end of June 2011. I mean unusual in that I don't think we have seen them in other states that have enacted these so-called "Amazon" laws aimed at trying to get remote sellers with affiliates in the state (generally people who get a commission for advertising the seller's website). (For background, see my 7/4/11 post, 7/19/11 post, and this short article.)

Here are some of these unusual things:

1. Amazon got approval to try to obtain signatures to try to get a referendum on the ballot so that voters can decide to repeal the affiliate nexus law. They need to get 504,760 signatures by 9/27/11. See item #1489 on the California Secretary of State website - here.
   
2. The Los Angeles Times reports that Amazon has invested $5.25 million to get the signatures ("Amazon ups the ante in Internet sales tax fight," 8/23/11). This is a lot of money!
3. Jobs and small businesses - both sides of the debate say it is about protecting jobs and small businesses! The Los Angeles Times article ("Amazon ups the ante in Internet sales tax fight," 8/23/11) refers to a group called More Jobs Not Taxes. At their website, they say they were formed to opposed the Internet tax law that will "hurt small businesses, kill jobs and undermine chances for any economic recovery in California." I'd guess that the reference to hurting small businesses is because Amazon and perhaps other Internet vendors cancelled their affiliate arrangements in California which means many will earn less commissions. Is it a job killer? I don't see that. And there are many small businesses operating in California that find it difficult to compete with Amazon because many of Amazon's customers don't know that they owe use tax when they buy taxable items form Amazon or any out-of-state vendor who does not collect sales tax. For example, see information from the American Booksellers Association (here) and Stand With Main Street (here). These groups say that not having online sellers collect sales tax is hurting small, main street businesses (the opposite of what the More Jobs Not Taxes group says). The California Retailers Association also supports the affiliate nexus law (see their 6/20/11 press release). This group says the law promotes jobs (the opposite of what the More Jobs Not Taxes group says).
   
4. The Health and Human Services Network of California is pushing a grassroots effort to get 2,000 signatures of people telling Amazon to collect the California sales tax - part of a "Think before you click" campaign. As noted in a KQED report (8/15/11), they also call for a boycott of Amazon.
   
5. A Los Angeles Times article of 8/25/11 - "California lawmakers try to head off Amazon sales tax referendum,"reports that the Senate Appropriations Committee is taking action to modify the original legislation to make a referendum impossible, thus ending Amazon's effort to get voters to overturn the law.

All of this is really odd and unfortunate. It will not lead to effective laws, an equitable and transparent tax system, and good use of money!

AND - it seems to continue the confusion many taxpayers have that when they buy taxable goods from Amazon or other out-of-state vendors, that no tax is owed. This is not correct - these customers must self assess and pay the use tax, which most can do right on their California income tax form. I'd guess that most people who sign the petition to get the referendum on the California ballot think they are signing to eliminate sales tax on these sales (rather than to just ensure that they must collect use tax rather than having the state try to get Amazon to collect it for them).

A better approach to all of this:

• California should work with Congress to enact legislation (currently S. 1452, the Main Street Fairness Act) which would allow for a uniform approach for states to collect sales tax from remote vendors. Amazon has stated that it supports this approach (see Mark Hachman at PCMAG.com of 7/26/11)
  
• California should consider adopting the Streamlined Sales & Use Tax (which it would be required to do under S. 1452 if it wants to be able to collect from remote vendors).
• Continue to educate people about the use tax. Even under S. 1452, small vendors would be exempt so there would still be a requirement for consumers to self-assess and pay use tax. This will be easier though starting in 2011 when most can use the look-up table (see proposed table at last page of this BOE document).

And, there are even easier ways to collect the tax - have it collected at the same time the buyer's credit card or Paypal account is charged for the taxable purchase. Retailers would no longer have filing and collection obligations, customers would not have to worry about use tax recordkeeping and reporting and states would get their money quicker (for more on that, see my blog post and testimony - here).

What do you think?

Amazon Cancels California Associates Contracts

As promised and expected by most, Amazon has cancelled its contracts with California-based Associates. I set up an account for my daughter, which we never activated for payment of commissions, so got an email on June 29, 2011 that reads as follows:

"Hello,
Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011. Those California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned before today will be processed and paid in full in accordance with the regular payment schedule.
You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect your ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. As mentioned before, we are continuing to work on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.
Regards,
The Amazon Associates Team"

As I noted in a March 9, 2011 post, the California legislation is not the same as the New York legislation in that NY offered amnesty for complying (see post). I also questioned the revenue estimates and why California doesn't do something more productive like work with the other states and Congress for a federal solution applicable to all states and all remote vendors. One good thing that California did in 2011 was enact SB 86 which will enable consumers to use a look-up table to determine their use tax liability (rather than have to keep records). This is a start towards improved use tax compliance, but without education and a law requiring taxpayers to make an entry on the use tax line on their state income tax form and indicate whether they filed a separate use tax form, it won't be as powerful as it otherwise could be (3/19/11 post).

I wonder if Amazon will find an alternative way for California residents to monetize their websites. It seems that one solution would be to change the arrangement to be cents per click rather than getting a commission. While I am not convinced that the payment arrangement is enough to distinguish advertising from sales commissions, it is likely to help as the Associate would get paid even if no sales are made (maybe).

Some think all of this will hurt Amazon's sales. I don't think so. The Amazon decision in January 2009 in New York noted that Amazon generated less than 1.5% of its NY sales from the Associates.* Today, people have heard of Amazon and can easily type Amazon.com into their browser and get there. Also, as long as the prices are better than other places (ignoring the sales tax even), they will do well. And, free shipping for orders over $25 is a good marketing approach.

But, are people fed up with Amazon and willing to go to other sites to make their purchase? Good question. I must admit, although I really like using the Amazon site for purchases, I have also checked prices at bn.com and if similar, have on occasion, purchased there (collecting sales tax is not a big deal for me as I have been keeping my records for many years and always pay my use tax!).

* Per the case (available free from The Public Library of Law), "Amazon further states that Associates' referrals to New York customers are not significantly associated with its ability to establish and maintain a market for sales in New York because they account for less than 1.5% of its New York sales (Amazon Mem at 27)."

What will you do - keep buying from Amazon or go elsewhere? What do you think California should do to reduce its use tax gap?