June 30, 2011 By Chad Vander Veen
Following California Gov. Jerry Brown’s Wednesday, June 29, signing of a bill requiring out-of-state retailers to pay sales tax on online transactions conducted within the state, Amazon and Overstock.com made good on threats they’d abandon their in-state affiliate companies who offer products via the retail outlets.
Some 25,000 companies within the state are Amazon or Overstock affiliates. In order to continue earning referral commissions, Amazon notified affiliates they’d need to move their operations out of California.
Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, Rebecca Madigan, executive director of trade group Performance Marketing Association, told the Los Angeles Times. The affiliates combined paid $152 million in state income taxes last year, she pointed out.
In a letter to affiliates, Amazon attempted to explain its position on the new legislation.
“We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. … As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective.”
Dan Mitchell at Forbes isn’t buying it. “It's hard to imagine executives at Wal-Mart sitting around a conference table, plotting ways to ‘harm’ Amazon affiliates. And those companies have a point: Amazon and lots of other online retailers get to sell competing goods without having to pay the taxes the brick-and-mortar outfits must pay. That's not fair,” he said, adding later, “Despite the moniker, the ‘Amazon tax’ applies to all online retailers that don't have a physical presence within California.”
Erik Sherman at bnet.com said Amazon’s real issue with the legislation is that it slashes the company’s competitive dominance over brick-and-mortar stores.
“It’s not as though Amazon pays for the tax out of its own pockets. All it has to do is collect the taxes, which consumers pay. Why is it fighting so desperately? The answer has nothing to do with constitutionality or real worries about efficiency. Amazon has an effective perceived price advantage over physical stores and other online retailers that have points of presence in states.”
Douglas A. McIntyre at 247wallst.com said Amazon is fighting a losing battle. Despite suing the state of New York over similar legislation, the affiliate program is a critical component of Amazon’s success.
Sooner or later, “Amazon will eventually run of out places where it can end affiliate relationships and close distribution centers. It has to ship its products from somewhere. Affiliates are critical to its overall revenue. Amazon knows it has begun to fight a war it will eventually lose. It may even be forced to pay back taxes on items it sold in some states in the past. No one knows what this will cost Amazon in the end, but the figure could be in the billions of dollars.”
The Washington Post’s Ezra Klein offered a succinct opinion on the matter, saying there is no more to Amazon’s reaction than the fact that “Amazon opposes this bill because it wipes out a price advantage they currently have against their competitors. … This is bad policy that they’re trying to protect — it’s starving states, killing brick-and-mortar stores and encouraging a race to the bottom among states who want to attract the offices of online retailers. [Jerry] Brown is right and Amazon is wrong.”
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