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Strapped for cash, California is considering legislation that could result in many online merchants needing to collect tax on sales to California customers. The bill, AB 178, would require collection of sales tax on sales to California customers by any online merchant who utilizes an affiliate marketer that is in California. As one would expect, California affiliate marketers and online merchants oppose the legislation.
First, we should explain what affiliate marketing is. Affiliate marketing networks are a form of "pay for performance" advertising. Ads for a merchant are placed by an affiliate (on other websites, for example), and the affiliate typically gets paid based on how many customers or visitors the ads bring to the merchant's site.
Currently, merchants who have a physical presence in California must collect sales tax from online sales to California residents. AB 178 would use California affiliate marketers to bring merchants with no physical presence in state under the duty to collect sales tax. Those with gross sales of less than $10,000 in California over the past year, however, would not be required to collect sales tax.
New York has a similar law. As recently tabulated by the Performance Marketing Alliance, states currently considering similar legislation include: Minnesota, Hawaii, Connecticut, Maryland and Illinois. There are rumors of similar initiatives in Florida, North Carolina and Tennessee.
The California legislation resembles New York's law, dubbed the "Amazon Tax." Amazon, along with Overstock.com, fought the New York law, arguing that it goes too far by requiring sales tax collection from merchants with no physical presence in the state. They lost in New York trial court but are in the process of appealing.
Assemblymember Nancy Skinner introduced California's AB 178. Its supporters point out that the amount of tax is not in question, simply the point of collection. This is because all Californians, technically, are supposed to report internet purchases and pay "use tax" on them when filing their tax return. Reality is that "use tax" on internet purchases are widely under-reported and underpaid. Assemplymember Skinner states that AB 178 would bring $55 million per year to the state.
Opponents include those providing affiliate marketing services in California, and out of state merchants who do not wish to be on the hook to collect California sales tax. Some affiliate marketers argue that online retailers will avoid the tax by simply cutting relations with affiliates in the state and taking their business elsewhere.
The bottom line for small businesses selling online is to keep an eye on internet sales tax discussions happening nationwide. States desperate for cash may make good on long held desire to capture sales tax on a greater portion of online sales. As California's AB 178 shows, this may not only affect where you sell, but what partners you use to sell online.