What is the New California Sales Tax Law?
California has adopted a new law placing it at the forefront of efforts to collect online sales tax from online sales in the state. As of July 1, 2011, the new California sales tax requires online retailers to collect sales tax if the company has any business presence in California. This includes online sales tax applicable not only to companies based in California, but also any company with business affiliates in the state. Thus, the new taxation of online sales impacts the operation of California’s affiliate marketers, as their relationship with online companies opens those companies to the online sales tax.
There are an estimated 25,000 affiliate marketers in California, operating websites in California that earn referral fees for directing customers to the online retailer. These websites, such as Savings.com and Ebates.com, provide coupons and services for comparison shopping. According to Performance Marketing Group, $1.9 billion of advertising revenue was generated last year by California affiliates of online retailers. These affiliate marketers are seeing their range of offerings decline as a result of the new online sales tax law. Amazon.com has already dropped arrangements with California-based websites to carry advertisements and links to its products to avoid the online tax. Other online retailers, including Overstock.com and e-commerce jewelry retailer Blue Nile, have also terminated their connection to California based affiliate marketers as a result of the tax. These termination notices are reportedly causing significant sales declines for California’s online affiliate marketing websites.
Shoes ‘R Us is a prime example of a small affiliate marketer operating in California. The founder, Nick Loper, began his affiliate marketing career by establishing a website, writing a blog to draw attention, and earning revenue as readers clicked on an ad that linked to a site where they made purchases. Mr. Loper reports that as a result of the new online sales tax ShoesRUs.com has lost 70 percent of his company’s revenue. The website states that the domain name is for sale and Mr. Loper has indicated that he is moving to Nevada.
Impact of New Sales Tax Online
By some reports, over 70 affiliate marketers have already left California to avoid the new sales tax. Some appear to have moved operation of their websites to other states; states which seem welcoming to these businesses and are eager to gain the business taxes that California has always collected from affiliate marketers. Other affiliates are considering new business models, such as payment based upon click through activity rather than commission on sales.
From the state’s point of view, California reported that sales tax collections for July were 12.5 percent below forecasts. This $139.4 million shortfall appears to confirm fears that the new online sales tax legislation will fail to raise tax revenue and leave shoppers with fewer options from Californian websites. If consumers turn to other sources, affiliate marketers and other online companies must resort to job cuts despite an already depressed California employment market in order to survive.
Both governments and affiliate marketers are watching California closely for the effect of the new law – particularly the reaction of Amazon, which has vowed to collect sales tax only if there were a federal solution, rather than a patchwork of state-by-state laws. Supporters of the new tax rule say that it levels the playing field by forcing big out-of-state retailers to collect sales tax on goods sold in California just like brick-and-mortar stores, and seven other states have passed similar laws for a sales tax levy of online commerce. Many physical location retailers long complained they had an unfair disadvantage by charging sales tax that effectively created higher prices for consumers. But thousands of affiliate website operators now say that the effect of the new online sales tax causes small business website affiliates to struggle. Consumer choices have been reduced because online retailers like Amazon and Overstock have cut off Californian affiliates. Meanwhile, the sales tax isn’t hurting Amazon as much as an entire segment of California’s Internet entrepreneurs.
Meanwhile, companies are waiting to see if a ballot initiative backed by Amazon succeeds in rolling back the new sales tax law in an election next year.
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.