(Followup to An Open Letter to Amazon.com and also this question response.)
Amazon has declared that, thanks to a new California sales-tax law requiring it to collect tax on sales to California residents, it is terminating the accounts of all California affiliates, i.e. the people, entities, and in some cases whole companies who use referral links to Amazon products to earn commissions on sales of those products.
The way Amazon worded their announcement, I could see no link between cause and effect. Sales tax and affiliate accounts have no obvious relation to one another. I concluded that this move was purely punitive on Amazon’s part. This isn’t farfetched, considering that last year, when Macmillan refused to discount their ebook prices, Amazon simply removed their books from sale. Amazon issues unilateral, self-serving demands all the time.
Readers have suggested some alternate explanations. Redcloud suggested that if Amazon kept the program active, it would be forced to charge California sales tax to non-CA customers if they came through a CA referral link. Alan suggested that the presence of CA affiliates would cause Amazon to have a “retail presence in California,” which they don’t otherwise have, which changes their tax status.
Current, until-yesterday law stated that businesses with a retail presence in California have to charge sales tax to California customers. This makes sense, right? If you’re a CA resident, you patronize a CA business, you pay CA sales tax.
If you’re a CA resident, though, and you patronize a Washington business online (Amazon), you don’t have to pay CA sales tax.* You’re supposed to pay “use tax” to the state of CA, but nobody ever does. I figured this new law was intended to close that loophole, and from everything I read, I assumed that all online businesses would now have to charge sales tax to California customers. A pain in the neck for out-of-state businesses, but good for California’s economy, right? Sounds about typical.
This interpretation of the law has understandably got some folks riled up. It imposes a huge burden on small businesses nationwide, for starters. I purposefully sidestepped any judgment on the merits of the law itself to instead address Amazon’s reaction to it.
(*Footnote: As this BoingBoing commenter points out, Amazon does indeed have a presence in California — through wholly owned subsidiaries. This allows it to claim that the Master Amazon Corporation TECHNICALLY does NOT have a presence in CA, and thus it avoids having to collect tax from CA customers. So Amazon is used to playing semantic corporate games in order to avoid the sales tax issue.)
But it seems like there may indeed be some connection between affiliates and sales tax that I’ve missed, and that Amazon did not bother to elucidate in their letter to affiliates. So to try and to clarify the issue, I’ve looked up the actual text of the law that was just passed.
Tax law is supremely convoluted so I’ve used lots of ellipses to get at the heart of the matter. Feel free to compare my summary against the actual text to make sure I’m representing the key points correctly.
SECTION 1. Section 6203 of the Revenue and Taxation Code is amended to read:
6203. (a) […] Every retailer engaged in business in this state […] shall, at the time of making the sales […] collect the tax from the purchaser.
(c) […] ”Retailer engaged in business in this state” specifically includes, but is not limited to, any of the following:
(1) Any retailer maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business. […]
(4) Any retailer that is a member of a commonly controlled group […] that, pursuant to an agreement with or in cooperation with the retailer, performs services in this state in connection with tangible personal property to be sold by the retailer, including, but not limited to, design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer.
(5) (A) Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise, provided that both of the following conditions are met:
(i) The total cumulative sales price from all of the retailer’s sales, within the preceding 12 months, of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, is in excess of ten thousand dollars ($10,000).
(ii) The retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to purchasers in this state in excess of five hundred thousand dollars ($500,000).
IN OTHER WORDS
• The law DOES NOT AFFECT all online retailers. Hand-wringing about mom & pop stores going out of business is unnecessary.
• Rather, the law RETAINS the existing rule that businesses only have to charge sales tax IF they are engaged in business in the state — but it REDEFINES what it means to be “engaged in business in the state.”
• The new definition specifies that having wholly owned subsidiaries in the state NOW COUNTS as “engaged in business in the state.”
• The new definition ALSO specifies that having paid affiliates in the state NOW COUNTS as “engaged in business in the state.”
• BUT this rule about affiliates ONLY APPLIES IF: your business has had over $10,000 in sales thanks to CA affiliate referrals, AND your business has had over half a million in sales to CA customers generally. Again, mom & pops need not worry.
IN SUMMARY
Amazon’s move toward its affiliates seems part of a plan to eliminate its newly-defined presence in the state of California, so it can keep avoiding having to charge sales tax.
Other, smaller online businesses out-of-state will mostly still NOT have to worry about charging CA sales tax, UNLESS they have over half a million dollars in sales to California customers.
The larger issue of “Should online sales be generally subjected to sales tax?” is almost entirely UNAFFECTED.
This MAY be a case of a law drawn up mainly to punish Amazon in particular, and capture what appears to be lost revenue. Maybe it IS the result of local retailers lobbying Sacramento.
Terminating the affiliates is STILL shady on Amazon’s part, though, and now we can add to their offenses “not being entirely clear about why.”
