E-Commerce Tax - California May Follow New York With Sales Tax Provisions

by Mike Godfrey, Tax-News.com, Washington

26 May 2009

In early February, California Assembly Member Nancy Skinner (D-Berkeley) introduced Assembly Bill 178, legislation that would modify the state's existing sales tax law in order to rake in extra revenue from internet sales. This has sparked debate on how to protect 'neighbourhood stores' from internet competition.

Modeled on New York State's recent Internet Sales Tax provision, AB178 claims that any web publisher who displays advertising from an out of state retailer, and subsequently earns a commission on a sale as a result of that advertising, establishes a presence in the state for the retailer, requiring it to collect sales tax on all orders received from residents of California. New York expects to collect approximately an extra USD70m by year's end. Skinner’s bill could generate USD150m for California.

But this legislation seems misconceived: affiliate marketers, who are the targets of this tax measure, are not an integral part of the internet retailers in question. Rather, they are paid for performance-marketing advertising. Affiliate marketers have websites that can be blogs, coupon sites, news sites, video websites - the whole range. By posting advertising on their websites, affiliates help customers to click through to a retailer's site and in turn are paid a small commission if a sale is made. Affiliates do not transact sales; they do not accept money for sales; they do not deliver products or services to consumers. Less than a week after the New York law was enacted, more than 250 retailers dropped all of their affiliates in New York, leaving thousands of affiliates, small- and medium-size businesses, severely compromised. In California, an estimated 30,000 small businesses use this business model, and many would go to the wall if the bill eventually goes through, while others will see much lower taxable income. The bill singles out performance-based online advertising and creates an extremely uneven playing field compared to other types of online and offline advertising, say its opponents.

Advocates of the bill enlist sympathy by blaming the ecommerce retailers for the demise of 'friendly neighbourhood stores' and claim that 'a level playingfield' needs to be created to force the internet sellers to compete on equal terms. But, say opponents, they fail to acknowledge the huge advantages to consumers brought by the internet in terms of finding more easily the right product at the right price to suit their needs and the fact that the internet has been the engine for new job creation providing hitherto unknown opportunities for self employment in niche businesses. The reality is that the competitive position of neighbourhood businesses can be only marginally affected by squeezing out affiliate marketers and the main objective is quite clearly to generate more revenue; even this is of doubtful worth when set against the loss of income tax and opportunities for small business and job creation.

AB178 was due for a hearing by Assembly Revenue and Taxation Committee on April 27, but was withdrawn at the last minute. Now it may not be voted on until January 2010 at the earliest. However the contents of the failed bill could be pushed through unnoticed in another bill or as an annual budget item.

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