California Amazon Tax Will Kill 25,000 Small Businesses

With the California legislature having just passed a flawed budget full of accounting tricks, budget gimmicks and money grabs, one area of small business is about to be taxed right out of business – just so that the state can fill a budget hole instead of making necessary and substantive cuts.

One of the budget trailer bills contains three formerly separate Internet tax bills now wrapped into one, to tax all Internet purchases made in California.

The ‘Amazon tax,’ AB 27 X1, is in legislative limbo. The tax was part of the budget deal that was vetoed only 10 days ago by Democratic Gov. Jerry Brown. But now legislative analysts are trying to get the governor, who has signaled his support for the tax, to sign the bill, or the bill will have to go through the legislative process again.

In the face of strong evidence that this trick would most certainly put many small e-retailers and internet affiliates out of business, legislators continue to pursue what they claim will be a $200 million windfall of tax income. AB 155, one of the online tax bills authored by Assemblyman Charles Calderon, would change the definition of a “retailer” to include any group “that performs services in this state in connection with tangible personal property to be sold by the retailer.”

The bill states, “Qualifying services include, without limitation, the design and development of tangible personal property (merchandise) sold by the retailer, or the solicitation of sales of TPP on the retailer’s behalf. Imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon the retailer’s gross receipts from TPP sales in this state.”

Calderon even included a “complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer.”

That about covers everything a retailer does. However, the bill specifies that the use tax is imposed on “purchasers” — the customer.

But many businesses cannot pass along additional costs to customers, particularly during a recession, when they are happy just to keep selling merchandise.

Instead, out-of-state retailers, and some eBay sellers are the only potential payers of this new tax money. And while many of them will be forced to collect the sales tax for California, most others stand to lose California’s business.

Amazon and other out-of-state retailers say they will stop doing business in the state, forcing more than 25,000 small affiliates to close businesses in California. Most commonly, the affiliates are small, mom & pop operations working out of their homes.

This will surely result in no new ‘use tax’ money, and the income loss from the termination of the California affiliates will be substantial.

For this reason, Performance Marketing Association executive director Rebecca Madigan said her association opposes the bill. The PMA represents 25,000 California small-business affiliates who earn revenue by placing advertisements for online retailers on their Web sites.

Madigan said they will be forced to move or terminate their businesses if and of the Internet tax bills are signed into law. “That’s 25,000 small businesses that will be lost to California’s already struggling economy,” said Madigan.

“The bill states that if someone has advertisements on California Web sites, then there is a nexus in California, and the business needs to pay taxes on all revenue collected in the state,” Madigan said.

Former Republican state senator George Runner, a current member of the Board of Equalization, has tried to warn lawmakers that if the Internet bill passes, “online retailers will terminate their relationships with the nearly 25,000 affiliates currently doing business in California. That’s what they’ve already done in other states that passed such laws, except New York, for purposes of mounting a legal challenge.”

Runner says that, while supporters claim the state will earn an additional $150 million in tax revenue, the punitive online tax bills would cut into the $42.2 billion in sales and use tax revenue paid last year in by California businesses, by chasing the online affiliate businesses out of California forever.

The Board of Equalization reported $124 million in state income taxes paid by affiliates in 2009 — an amount which many say has increased since 2009.

Amazon, eBay and other out-of-state businesses don’t pay California sales and use taxes because they don’t get any benefits from the state. Their workers live in other states, and do not benefit from California’s schools, roads, and other state services.

The Interstate Commerce Clause of the U.S. Constitution stipulates that only the federal government can pass laws concerning commerce that crosses state borders. That’s a key reason for America’s prosperity the last 220 years: there are no tariffs among the 50 states. It’s a vast, free trade area with 310 million producers and consumers.

Charlie Hollander, a New York diamond seller and online affiliate, does business with both Amazon and eBay. Hollandar explained that the two online retailers do business a little differently.

“Amazon invoices the client directly, while eBay requires the seller to invoice and collect. And Amazon pays affiliates directly, minus a commission.” But Hollander said, Amazon deals with American sellers, while eBay has international sellers. “How are eBay sellers going to pay taxes to all of the countries, much less to all of the American states?” asked Hollander.

Other sellers are greatly concerned as well. Loren Bendel of, a Texas native who moved to California more than 14 years ago to pursue internet opportunities warned, “If California is not careful, they will actually be creating incentives to start businesses in other states. California is no longer the center of innovation and technology and creative breeding ground. People have other choices now.”

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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