I’ll admit that I remained willingly ignorant to the Internet tax issue in New York because, well, I don’t live in New York. Apparently, California is looking to implement a similar bill, AB 178, which was introduced earlier this month. Now, my eyes are open.

I won’t get into the specifics about the New York issue as I am still admittedly rather ignorant on it and there is plenty of information out there already. What I want to provide is the information I’ve found on the California bill, introduced by Charles Calderon (D) and Nancy Skinner (D). It appears that the California bill is much more air tight than New York’s. Here is the section that applies to affiliates and referred sales via links:

(5) Any retailer entering into an agreement with a resident of
this state under which the resident, for a commission or other
consideration, directly or indirectly refers potential customers of
tangible personal property, whether by a link or an Internet Web site
or otherwise, to the retailer, if the cumulative gross receipts or
sales price from sales by the retailer to customers in this state who
are referred pursuant to these agreements is in excess of ten
thousand dollars ($10,000) during the preceding four calendar
quarterly periods. This paragraph shall not apply if the retailer can
demonstrate that the resident with whom the retailer has an
agreement did not engage in referrals in the state on behalf of the
retailer that would satisfy the requirements of the commerce clause
of the United States Constitution during the four quarterly periods
in question.

If a company is located in California, they currently have to charge tax to California residents. From what I understand, the law will change as follows: Companies outside of California will have to tax all purchases made by California residents if the company has any affiliates located in California and those affiliates’ sales account for $10,000 or more of their quarterly sales. Once that mark has been reached, all sales made that quarter to California residents become taxable.  The reasoning behind this is that politicians believe the merchant is soliciting business, rather than simply advertising. The merchant would have the incredibly difficult task of proving they brought in less than $10,000 in California sales via California-based affiliates in order to not collect the tax. The answer for the merchant who does not want to deal with those taxes is to drop affiliates in California.

I asked Kevin Webster, of 72Kilowatts.com, about the situation, specifically how it affects those of us in affiliate marketing and if it affects in-house ad sales or CPC revenue. This is what he had to say:

1.) It directly impacts the merchant and the consumer. The affiliate is not involved in the tax process. However, some merchants will dump CA affiliates in order to avoid having to collect the sales tax.

2.) Your second question is a good one, as your law is worded a little different than the NY law. I read it that it affects ALL kinds of online advertising. But a lawyer will have to look at that more closely.

Once the affiliate “nexus” is created, meaning it’s determined that a merchant does $10k per quarter to CA residents from CA affiliates (again, can be tough to determine, so many merchants just assume they “do” to avoid trouble), then ANY and ALL sales by that merchant to CA residents become taxable.

The affiliate question then becomes removed from the equation. In other words, affiliates are being used to set the criteria, but once it’s set, they no longer matter.

Please take action: Contact Californai State Assembly, California State Senate, Twitter Schwarzenegger, Revenue and Taxation Committee Members

- Nancy Skinner – Tel: (916) 319-2014 (staffer: Liz Mooney)
- Charles Calderon – Tel: (916) 319-2058 (staffer: Tom White)

You can also leave comments on the bill here.

Do not just call or email – write letters too!

If you call and speak to a staffer, chances are the message will go nowhere and will probably lie to you, especially if you ask for a hearing date in order to speak out against it. They do not want the opposition! And don’t simply contact the co-authors, one of which is the Chairman for the Assembly Revenue and Taxation Committee. Write to your own Assembly Member and Senator as well. The earliest committee vote is, apparently, scheduled for March 5, 2009.

If passed, this bill may very well mean that many smaller merchants may go out of business. The manpower required of small business owners (staffing, collecting, paying, etc.) may be too much for them to bear. For those affiliates who have a lot of their eggs in one basket, and if that basket were a merchant who would would rather drop you than to deal with the taxes, you need to be ready, or else risk having your business destroyed.

Not that this is scary enough as it is, but consider that the two states to look at this law are New York and California. As these two extremely large states, in terms of population and revenue, will become examples, other states are sure to follow. As states, such as California, introduce bills like AB 178, affiliates and businesses will look to move elsewhere. This will be very detrimental to any state considering such action. As one affiliate pointed out, “Politicians will take the way that gives them the better image within their own state. Choice – collect tax from out of state merchant or raise other taxes that get noticed (school, property income…)”

For more information check out the California Affiliate Forum, New York Affiliate Forum, 72Kilowatts.comand NYAffiliateVoice.com.