
California Startups: Legislative Emergency - kposehn
WTF?<p>This post is for California based startups - you may still want to read to get more info on what is going on because laws like these are cropping up in other states.<p>WHAT IS HAPPENING:<p>Last night I was informed that Governor Brown will sign into law the California state budget, including trailer bill ABX1 28 (text here: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0001-0050/abx1_28_bill_20110615_amended_sen_v97.html )<p>This bill is commonly known as an "affiliate tax"; it establishes "nexus" (an in-state presence) for online retailers that are out-of-state if they are working with affiliates in the state of California.<p>WHO IS AFFECTED BY THIS:<p>This bill will get you if you qualify for any of these points:<p>1. You gain any revenue from an affiliate program such as Amazon Associates, any merchant out-of-state in Commission Junction/LinkShare/GAN, etc.<p>2. If the total amount of sales you have generated for the merchant in the previous 12 months before the bill is signed exceeds $10,000 OR the merchant in total has sold over $500,000 of merchandise to California customers period.<p>3. If you do not have a fixed IO (Insertion Order) where the merchant specifically asks to advertise on your site and does so with a fixed budget and amount to be spent (this is still shaky, I'm currently getting advice from my lawyer on this).<p>There are more factors I'm getting from my lawyer today, I'll post them as they come up.<p>WHAT IT WILL MEAN:<p>This bill will be signed into law on Friday apparently. As California is under a Fiscal Emergency, the law will take effect IMMEDIATELY. The moment it is signed, any merchant that has a relationship with you that qualifies in the points above will be immediately subject to fines and/or legal action.<p>This will result in the immediate loss of any further revenue you would gain that qualifies.<p>WHO SPONSORED THIS JUNK?<p>This trailer bill is the roll-up of three separate bills introduced in the California legislature this year:<p>1. AB153, Sponsored by Nancy Skinner, Berkeley. She has tried this bill every single year for 3 years. She has no grasp on the effect this will have on her own constituents (startups in Berkeley) and doesn't care. Bill text: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0151-0200/ab_153_bill_20110627_amended_sen_v97.html<p>2. AB155, Sponsored by Charles Calderon, East LA. This is another version of the bill above, the guy who put it forth has no clue about how the internet works from what I can tell. Bill text: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0151-0200/ab_155_bill_20110502_amended_asm_v97.html<p>3. SB234, Sponsored by Loni Hancock, Berkeley. This one is the worst of all, as it could qualify any manner of online presence/contracting/advertising as nexus. This thing is nuts and Loni Hancock has literally no clue how this works and doesn't care a whit about the effect it will have (she said as much). Bill text: http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0201-0250/sb_234_bill_20110209_introduced.html<p>These bills have been heavily lobbied by Wal-Mart, Target, Best-Buy and Home Depot. They created the "alliance for main-street fairness" to push these bills. The irony, that they helped kill main-street and profess to be helping it, is sickening.<p>OH HELLS BELLS WHAT CAN I DO?<p>Get the word out. There is literally no time to waste. Every single startup that relies on income that qualifies can be affected horribly by this. Tell everyone, I don't care how, just spread the word.<p>Write it on your blog. Make phone calls. Get to the tech blogs if you can. Do anything and everything in your power. The situation is dire and while we only have a whelks chance in a super nova to change this, we have to try.
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gojomo
I like Amazon a lot. (Currently a Prime customer and have a California-based
site that makes a small trickle in affiliate fees.) I want taxes to be low or
non-existent.

But the cross-border sales-tax exemption is broken in the modern era. There's
no reason to give such a big de facto price advantage to distant retailers.
The infrastructure that makes a state's residents good Amazon customers –
high-paying jobs, spacious homes in attractive communities with full
utilities, roads for overnight deliveries – needs to be paid for with broad,
low taxes on all who benefit.

Amazon benefits. And Amazon has multiple California subsidiaries.

Amazon hasn't argued against 'Use Taxes', so it's not like they're making a
principled stand that states have no legal right to this 8-10% of the purchase
value. Amazon just doesn't want to collect it, which essentially helps their
customers evade a legal (but usually-ignored) Use Tax.

~~~
nostromo
All fair points, but let's get out of the clouds of idealism and look at the
actual effects of the law.

This law will move start-ups out of California without raising a single penny
in new revenue. It may actually decrease the tax base by moving income out of
the state!

So, yes, if you want CA to 'make a stand' to prove a point, fine -- but it
makes no pragmatic sense for anyone.

~~~
gojomo
Many states are now acting on this same issue, so the number of places a
start-up could flee to is rapidly dropping.

New York, Texas, North Carolina, Colorado, and Illinois are definitely out.
And Amazon already collects sales taxes for North Dakota, Kansas, Kentucky,
and Washington.

So if your start-up is so sensitive to affiliate revenues you'll avoid all
those states, have fun wherever you wind up. I suppose Portland remains a nice
spot – no Oregon sales tax at all.

~~~
nostromo
I think you're confused -- Amazon has affiliates in both Washington and New
York; affiliates in those states are fine. And so are affiliates in the states
that already collect sales tax that you list -- which makes me think you don't
understand the issue at hand.

Add in the 5 states that don't charge sales tax, and there are plenty of great
options to locate a business.

~~~
gojomo
You're right that I was confused about the effect of being in a state where
Amazon already has to collect sales tax. (I was thinking of tax-minimizing
consumers, rather than the affiliates). When Amazon has a presence that
requires them to pay sales taxes in any case, they have no credible threat to
end affiliate payments. So, it's safe to remain an affiliate in those places.
A happy result for Amazon, affiliates, and the States, apparently.

California and others want that same deal.

In New York, Amazon threatened to pull out but is temporarily paying sales tax
(some reports suggest into escrow) and maintaining the affiliate program
pending a legal challenge. Amazon may yet wind up losing their challenge, in
which case they would have to decide whether to treat NY like other states
where they collect sales tax – which would render being an affiliate safe – or
to follow through on their affiliate freeze-out.

New York has essentially chosen the same course as California, so it will
likely be resolved the same way in both states. Other states, likely including
Texas and Massachusetts pending current legislative battles, are following
this approach as well.

My point is: this isn't just a California-shooting-itself-in-the-foot
situation, and a company can't just jump to anywhere-but-California to get
back into the affiliate program. Many states, including many other top tech
and business centers, are treating Amazon the same as California.

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nostromo
We were expecting this and were already preparing to relocate out of
California. Since our team is largely virtual, switching to Washington as our
primary place of business is very easy -- just a few documents and a new
address. California in no way benefits from this -- in fact I think they just
did Seattle and other tech communities a big favor.

~~~
kposehn
Exactly. I pivoted my business away from being an affiliate successfully and
now plan to eventually leave this state. No sense in staying in a state that
is blatantly hostile to it's own economy.

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inconditus
Amazon will cancel their Affiliate program for California if this happens,
just got this email:

<http://pastebin.com/yRLUf0Zg>

~~~
kposehn
Yeah, the affiliate termination notifications are already rolling in today.
Got a bunch already.

------
kemiller
So I realize this opinion will be unpopular, but the tax nexus issue is huge
and really is unfair. California residents are legally obligated to pay sales
tax on online purchases from out of state, but of course, no one does because
Amazon et al have gone out of their way to avoid having to collect it. They
effectively get a free ride, tax-wise, which just forces the taxes to go
higher everywhere else.

The big box stores you mention obviously have an interest in all this, but it
genuinely does hurt the local mom and pop's too.

It really needs to be fixed federally, though, or you get the kind of nose-
cutting behavior you see from Amazon. Losing California from their affiliate
program would hurt more than the states that came before.

~~~
kposehn
I agree with the federal point - it needs to be solved there. The mom and pop
businesses that get hurt though are hurt far more by Wal-Mart et al, not
Amazon.

~~~
kemiller
Yes and no. In some places, certainly. In lots of urban California, not at
all. Not a Wal-mart in sight, but lots of local shops and plenty of Amazon
customers. As a rational shopper, your best course of action for anything over
$100 that you don't need today is to check it out in the local store and then
buy it from Amazon. Kinda sucks for the folks stuck maintaining storefront and
inventory to have to do so with an almost 10% handicap.

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markwelch
Today, California forced Amazon to terminate its advertising relationship with
me. Today, I lost 26% of my advertising revenue. Amazon will not suffer as a
result; California will not benefit either.

Unfortunately, we've known this was coming for several weeks; it was included
in the budget partly to placate local booksellers and big-box retailers (Wal-
Mart, etc.), but primarily to falsely claim $195 million in additional revenue
(as part of about $4 billion in "smoke and mirrors" revenue claims).

Of course, everyone knows that won't happen: as expected, Amazon terminated
its advertising relationships with California web publishers today, so the
$100 million of sales taxes that the state "expected" from Amazon is gone. The
remaining "expected" revenue will follow, as Overstock and a hundred other
out-of-state merchants terminate Californians from their affiliate programs.

It's wrong that Amazon and other out-of-state retailers don't collect sales
tax in all states with sales taxes. But this law doesn't address that problem
at all.

This topic has been widely discussed on ABestWeb.com over the past three years
as similar laws were enacted in New York, North Carolina, Rhode Island,
Illinois, and other states. Except for New York, none of these states have
collected additional sales taxes from the laws.

My blog post today: [http://blog.lessonindex.com/2011/06/california-forced-
amazon...](http://blog.lessonindex.com/2011/06/california-forced-amazon-to-
stop-advertising-here/)

------
babar
Can someone explain this for people who are not familiar with the way these
affiliate programs work? Were people not paying taxes on affiliate revenue and
would now have to start? Or is this a tax on the end customer buying from
Amazon (which would be forced to collect CA sales tax)? How do either of these
impact startups in CA? Does this impact businesses registered in DE that have
an office in CA?

~~~
kposehn
Here's the way it works:

You have a startup and part of the way you monetize is by having affiliate
links on your site or in your product.

Affiliate links are given to you when you join an affiliate program. The
merchant you work with agrees to pay you a percentage of every sale or a fee
for some action. When someone clicks on one of the links on your site and buys
something, you get paid a commission.

The US constitution commerce clause basically says that the merchant is not
obligated to collect sales tax if they do not have a physical presence in the
state (otherwise known as a nexus). That means that if you live in Utah and
sell to a customer in California, and you don't have any physical offices or
presence in California, you don't have to collect sales tax.

The responsibility of reporting sales tax for online transactions falls to the
citizen of California who is obligated to report it on their tax return. They
seldom do.

The law about to be passed in California would designate any affiliates as a
nexus for out-of-state retailers, requiring sales tax to be collected. This
violates the commerce clause as it is not specifically included (in short
violates the spirit of the law and is not defined clearly in the letter of the
law).

This impacts startups and businesses in California that make revenue from any
of these affiliate programs. Two high profile startups I know of are
TheFind.com and Shopobot. A big affiliate (I went with one of the founders to
lobby to help kill these bills) is Ebates.com. Each of these has offices in
California and would be hurt by this bill. Apparently Shopobot is headed out
of state (someone from there posted today about it), as is Ebates (to my
knowledge). There are about 25,000 businesses that are going to be really
harmed by this legislation and they really have no choice but to leave.

I believe this bill will qualify even if your company is registered in
Delaware but you have an office in California. I'm still getting legal advice
on this, but it doesn't look good.

The general result of bills like these is that the affiliates or businesses
leave the state to protect their income and the state loses out on the tax
revenue. Net effect is typically a dive in the tens to hundres of millions in
tax revenue. Illinois is a great example where several companies with hundreds
of employees left the state.

Hope this helps you get a clearer idea :)

~~~
slessard
Minor correction: Congressional authority for taxation derives from the
"Welfare Clause", Article I, § 8.

~~~
kposehn
Thanks for the note :)

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breck
Can you post the phone #'s for these reps? This is awful. I want to personally
contact all their offices and voice my complaints.

~~~
kposehn
Here's Nancy Skinner's contact info from her web site (she sponsored AB153 and
has pushed for these taxes for 3 years in a row):

Capitol Office: State Capitol P.O. Box 942849 Sacramento, CA 94249-0014 Tel:
(916) 319-2014 Fax: (916) 319-2114

District Office: Elihu Harris State Building 1515 Clay Street Suite 2201
Oakland, CA 94612 Tel: (510) 286-1400 Fax: (510) 286-1406

------
kposehn
__UPDATE __

Brown just signed the budget trailer bills, including the affiliate nexus tax.
I just went into effect immediately.

That's that I guess.

------
richcollins
Affected companies will end their affiliate programs so they don't have to pay
the tax. This means that the state won't collect the tax revenue anyway. It's
obvious that this is just a ploy by competitors (Walmart) of companies with
successful affiliate programs (Amazon).

------
minouye
Is anyone aware of what smaller online-only merchants are intending to do
(smaller players on CJ, Linkshare, etc.)? Have they followed Amazon's lead in
other states where this was an issue (e.g. Illinois, Colorado, etc.)?

~~~
kposehn
Yeah, a lot of them are terminating affiliates as well. The legal risk is
generally too great so they go with the safest route.

Can't really blame them; the fines for violating are pretty nasty.

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saalweachter
What's this "Amazon doesn't collect sales tax" thing? I'm in NYC and I pay
sales tax on items purchased from Amazon.com.

Total Before Tax: $47.99 Estimated Tax To Be Collected: $4.26

If that's not NY sales tax, it sure looks a helluva lot like it.

~~~
zamfi
You may be buying from a merchant located in NY state. Does the item you're
looking at say "sold by XXX"? XXX is probably located in NY.

Amazon collects sales tax on behalf of merchants who do have a physical
presence in the state.

~~~
kposehn
Sort of. Amazon must collect sales tax for transactions where they sell a
physical product to a customer located in states where they have "nexus" (a
physical presence). These bills extend nexus to include affiliates.

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alanmccann
Thank you, Silicon Valley, for voting overwhelmingly Democrat and bringing
this and other business killing legislation here in California and
countrywide.

~~~
pbreit
That's kind of silly. Shall we thank you and other Republican voters for the
recession?

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scarmig
"She has no grasp on the effect..."

"...the guy who put it forth has no clue about how the internet works..."

"...has literally no clue how this works and doesn't care a whit about the
effect it will have..."

Really? Is e-commerce so weak that it can't compete on a level playing field
with physical retail? Even if you think it is that weak, is it really so
outlandish for people to think it can that it's worth a page of venom-filled
invective? Yeah, Amazon's cutting off its nose to spite its face here, but
doesn't that mean you should be mad at Amazon, not the state government?

~~~
kposehn
It isn't that e-commerce is weak at all. The playing field is skewed in
e-commerce's favor because it is often offering a better experience and price.

A lot of mom&pop retailers have figured this out and started selling online.
They sell on Amazon and eBay and reach the entire world. Many successful major
online retailers started this way.

Also, it is hard to not be upset when you go to the effort I have; I went to
Sacramento and met with the politicians. I tried to change the course of this
legislation. I stood up for others to try and keep this from happening. I can
see the damage this is doing and how it won't gain the state any revenue at
all.

I don't blame Amazon and the other retailers for what they have to do. The are
faced with a decision where they can be on the hook for something that is
specifically designed to muck with them. The legislation forces them to do
this, not the other way around. There is a definite fiscal incentive for them
to terminate affiliates; and also one for affiliate to leave the state.

In the end, tax revenue is lost by the state and the bill just forces
businesses out :-/

~~~
scarmig
This ignores the critique that the "better experience and price" online retail
offers comes about because Amazon doesn't have to pay sales tax. This makes
everything Amazon sells 10% cheaper in California, which means that even a
totally equivalent experience offered by WalMart would be seriously
disadvantaged.

That said, this is a very sub-optimal solution--it's lose-lose-lose. It comes
down to the fact, though, that one of Amazon's key competitive advantages is
being able to avoid sales tax, and no solution which is (a) genuinely
achievable and (b) levels the playing field will be supported by Amazon.

~~~
kposehn
I agree, it is a sub-optimal solution. However, Amazon does support the
streamlined sales tax which would achieve both points. There needs to be some
federal solution to make reporting easier and the streamline seems to be the
best way put forth so far.

