Amazon One Clicks Its Associates Down the River

Two days ago, Amazon sent out a “Notice of Contract Termination Due to Potential New California Law” to its Amazon Associates in California. The letter warned that Amazon would terminate its affiliate program with California residents if the state required out-of-state retailers, such as Amazon, to start collecting use taxes if they paid referral commissions to persons within the state.

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers – including but not limited to those referred by California-based marketing affiliates like you – even if those retailers have no physical presence in the state.

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. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

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. We will send a follow-up notice to you confirming the termination date if the California law is enacted.

Well, Governor Brown signed ABX1 28 into law and a few hours later, Amazon sent this follow-up termination notice.

Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011.

Fast and efficient–the Amazon way. No, Amazon was not bluffing. The Assembly Bill Analysis anticipated a $195 million increase to the General Fund and a $122 million increase to special and local funds. The $317 million total matches the numbers provided in the Staff Legislative Bill Analysis of a similar bill. In that report, the State Board of Equalization predicted a $317 million state and local revenue increase in 2012-13 assuming “a purely static world (no behavioral changes resulting from the change in tax policy) with full compliance.” Even if Amazon canceled its affiliate programs, which it did, the BOE still anticipated increased revenues of $234 million based on these caveats:

If other firms were also to terminate their affiliate programs in response to the enactment of this bill, the potential revenue gain would be further diminished. Similarly, while we lack the data to determine to what extent out-of-state retailers would discontinue their use of eBay to sell to California consumers, any drop in such eBay usage would even further lower the revenue gain.

Additionally, the termination of affiliate programs would have an adverse impact on state employment, which in turn would lead to lower revenues from sources such as the personal income tax and the corporation tax. The amount of these potential reductions is unknown.

California Use Tax

The new law amends Section 6203 of the Revenue and Taxation Code by requiring certain out-of-state retailers to collect use taxes for the sale of tangible personal property. Specifically, it targets retailers in two ways: affiliate nexus and corporate nexus. First, the law imposes a use tax collection duty on retailers that pay commissions to persons in the state for the referral of “potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site.” Amazon rendered this section inapplicable by canceling its Amazon Associates program with California residents.

The law also imposed the same use tax collection duty on retailers with in-state members of a commonly controlled group who perform “services in this state in connection with tangible personal property to be sold by the retailer, including, but not limited to, design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer.”

Amazon companies located in California include:

  • a2z Development Center, Inc., with offices in Irvine, San Luis Obispo and San Francisco, CA.
  • Lab126 in Cupertino, CA.
  • IMDb in Studio City and Los Angeles, CA.
  • A9 in Palo Alto, CA.
  • Adzinia Media Group LLC in Studio City, CA

The most relevant of these would be Lab126, which develops the Kindle, a type of tangible personal property that is sold by Amazon in California. In response to the first section, Amazon dropped its California Amazon Associates. If the new imposition of use tax collection duties is constitutional, then Amazon should pull its R&D centers from the State of California as well. Otherwise, what is the point of escaping use tax collection duties under one section, but not another?

Admittedly, relocating a subsidiary out-of-state is much more difficult than firing off an e-mail terminating its affiliates. So, I doubt if this is the final word from Amazon on this dispute. If Amazon does not move its subsidiaries out of California, I would expect the company to challenge the constitutionality of the new tax law in court.