Can Online Tax Measure Destroy 25,000 California Businesses?
The California Assembly Revenue and Taxation Committee has made a party line approval of Nancy Skinner's Assembly Bill 153. Skinner, a Democrat, has been proposing different versions of this bill for more than two years.
The bill proposes to raise sales tax from out-of-state retailers, when they make sales through certain types of advertising, on websites owned by California entities. The tax will not apply to sales using the same advertising method, even if the buyer is in California, if the website carrying the advertising is owned by a non-California entity.
California Senator George Runner reports that leading online retailers, including Amazon and Overstock, told him that passage of this bill will force them to terminate their relationships with their California-based affiliates.
"I am disappointed by the Committee's decision to move forward with a tax measure that will cost California jobs and hurt state revenues. There are as many as 25,000 internet affiliate businesses based in our state that could be wiped out by this bill."
- Senator George Runner
Runner is not opposed to collecting sales tax or use tax, but says this bill is not the way to do it because it is likely to collect little or no tax at all, and also damage or destroy California businesses and increase unemployment.
The internet retailers have previously terminated their relationships with small businesses in other states when those states introduced similar laws. The laws place unreasonable burdens on the retailers and they can easily terminate the relationships and expand relationships with website publishers based in other states instead.
Rather than increasing state income, the bill is likely to destroy tens of thousands of California businesses and lead to a loss of income for the state, cause hardship for around 25,000 small online businesses and cause layoffs and unemployment. This was the result in New York.
Although the stated goal is to gain income, the main push for the bill was previously from local bookstores - most also sell on the internet. Now Skinner has a wider coalition of supporters, who either do not know or do not care about the small businesses that would be harmed.
The current version of the Skinner bill is trying to redefine 'physical presence' in California to include the use of online affiliate advertisers, that are based in California. Other types of internet advertising, which are virtually indistinguishable from the affiliate ads, are not affected by the law.
Senator Runner told NewsBlaze "The bill simply won't work. Out-of-state retailers will cut ties with their California affiliates and continue selling to California consumers. The only thing AB 153 does is kill up to 25,000 affiliate jobs in California. That's the last thing we need."
An editorial in The Los Angeles Times says the bill is a good thing because it will stop Californians who cheat the state by buying goods on the internet, and fail to pay sales or use taxes. It praises Senator Runner for his stance on paying use tax, but fails to see that it is likely to destroy tens of thousands of California businesses and still not collect the tax. The editorial seems more interested in having California "force the issue" of online taxes.
The law would hurt California businesses because the law is not US-wide and the retailers can advertise with other publishers. It also targets only one type of advertising relationship, but not others.
Back to the original question - Can this online tax measure really destroy 25,000 California businesses?
Here is what Overstock says it will do if the law passes:
"We will respond to the legislation by terminating our relationship with California-based affiliates. We have done this in every state where this legislation has passed, and we will do so in California."
This is no idle threat by Overstock or other retailers, because the California legislature passed a similar law in 2009 and Overstock terminated all their California affiliate contracts, restoring them when the legislation was vetoed.
One important question is why would Overstock damage their own business by dropping all their effiliates? The answer is that dropping affiliates has zero consequences for their business. The only loss is to the affiliates in that state and the state government that passed the law.
Here is what Overstock said about that:
"Affiliate ad terminations in a given state do not affect our sales, our ability to advertize locally, or any other aspect of our business. Since the Internet is borderless, there is no advantage to using a California affiliate over any other. Thus, when one state closes its doors by passing an unconstitutional tax law, it is as easy as throwing a switch to walk that business through the open door of some other state and hand that business to the affiliates located there."
The retailers have already dropped affiliates in each instance following the passage of these laws.
The first state to pass this type of legislation was New York, and Overstock terminated their affiliate relationships as soon as the law became effective.
Here is the telling information that California legislators and supporters of the bill are deaf to hearing, straight from Overstock:
"Our business in New York did not change: our ads are still seen by New York customers, we still sell to New York customers, and we do not collect nor remit any New York sales tax. There were only two known effects the New York affiliate tax nexus law had relating to Overstock.com: First, the millions of dollars we formerly spent in payments to New York resident advertisers shifted to advertisers in other states; and second, we sued New York. We are still suing, and believe we will ultimately succeed."
This type of law was just passed in Illinois and Overstock terminated their affiliates. Some of the larger affiliates moved their business to other states.
Amazon already terminated their affiliates (Amazon calls them "associates") in North Carolina, Rhode Island, and Colorado and is preparing to terminate associates in Illinois.
In every case, these state legislatures helped destroy small businesses in their own states because they were too shortsighted and didn't understand the business. California legislators have no excuse at all because they know the history. The LA Times editorial naiively says they want to "force the issue" - whatever that means, but all the law will do is destroy up to 25,000 small businesses and destroy California's own tax base.
Destroying tens of thousands of small businesses, some of which have many staff in California, and who have been hiring throughout this recession, makes no sense at all.
A California LLC pays a yearly minimum tax of $800, plus other fees. If just 1,000 LLCs move to another state or shut down, California loses $8 million, just on that minimum tax. Also consider how much money 25,000 small businesses spend in California each year and what that loss will do to brick and mortar businesses that service them.
Skinner said in January, "Our objective must be to create a pathway to economic recovery not only for the state but for each and every Californian." How does destroying 25,000 small businesses, raising unemployment and reducing the tax base meet that objective?
NewsBlaze isn't waiting around to see if this law passes. We are preparing to move the company to Nevada, but that is a story for another day.
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