Ordinarily, if a large corporation has a physical presence in a state, then that state can charge sales tax on transactions. California, in a desperate attempt to raise more money, has decreed that Internet transactions are now taxable even if the company has no physical presence in California and the goods were shipped from, say, Nevada to Missouri.
Yes, the great minds of the California legislature have decided that if you or a charity or a little mom-and-pop business use affiliate marketing to sell goods and are in California, then sales tax must be paid. Amazon has said no way and has cancelled affiliate marketing for anyone based in California (and Connecticut too, for the same reasons).
Affiliate marketing is when a website or blog has an ad linking to another site to buy something. If a sale is made, the affiliate gets a small percentage. Amazon is perhaps the best known of the affiliates. Many websites have an Amazon store listing goods for sale, or they put a special code in their link to an Amazon book, in hopes of getting income if purchases are made
There are many other large affiliate programs that generate money for Californians. They will either have to start charging sales tax for any transaction from a California affiliate, which means additional expenses to reprogram how their system works and for tracking and sending the money to the State of California, or, what’s more likely, and what is already happening, is that affiliates marketing companies will simply drop anyone in California.
This seemingly ill-thought-out money grab by California is expected to raise $200 million. CalWatchDog says it could cost California more than that in lost revenue as small businesses, nonprofits, and charities take a hit on their income. The OC Register lists several California businesses that are now losing major revenue because their affiliate marketing was cancelled. Some of them may go out of business. In addition, many California charities use affiliate marketing to raise money, but can no longer do so.
The irony of all this is that Amazon, for example, is not based in California, and does not benefit from California services. So why should sales tax have to be paid in California because Amazon got an order from an affiliate here when the book was shipped from Amazon in Seattle to someone not in California?
Amazon is fighting this tax in court and supports a ballot initiative, which could be on the ballot as early as next year, to reverse the law. Amazon alone has cancelled contracts with thousands of affiliates in California. Other affiliate marketing companies have done the same. We are talking a large amount of lost revenue for Californians.
As usual, the California legislature appears to have shot itself in the foot with an attempt at a short-term money grab with no concern for long-term consequences.