California Apparel News

Internet giant Amazon.com cut its business with its affiliates based in California. The move took place on June 29, the day after the California Legislature passed a provision requiring out-of-state Internet retailers to collect sales taxes for California transactions.

The move does not impact California e-commerce sites or California manufacturers, just website publishers that post advertisements and coupons for the retailer on their websites. These affiliates earned revenues of $1.9 billion in 2010, according to Rebecca Madigan, executive director of Performance Marketing Association, a Camarillo, Calif.–based trade group for affiliates. “They can lose more than 25 percent of their income overnight,” Madigan said.

With the passage of the provision, California lawmakers closed a loophole that allowed Internet retailers to not charge sales tax on purchases. The loophole was instituted in the early days of e-commerce, when online retailing was a struggling industry. The new tax was part of the California state budget that was passed on June 28.

In a statement mailed to its California affiliates on June 29, Amazon said its ties to its Golden State affiliates would only be restored if the tax is rescinded.

“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.”

Amazon and another e-commerce retailer, Overstock.com, took similar actions against North Carolina, Arkansas, Rhode Island, Connecticut and Illinois after the legislatures in those states passed Internet tax laws. Amazon did not cut ties to the state of New York when it passed an Internet tax law in 2008. Rather, it sued the state, and the case is currently in the appeals process in New York.

California’s Internet tax law was applauded as a measure that leveled a playing field, said state Sen. Loni Hancock (D–Berkeley).

“No longer will out-of-state online merchants be able to underprice local stores and California-based online businesses by as much as 10 percent by simply refusing to collect state sales tax. It’s only fair,” she said in a June 28 statement.

Bill Dombrowski, president of trade group California Retailers Association, said in a June 20 statement that the out-of-state e-commerce retailers had an unfair advantage with a tax loophole that had resulted in job losses for California’s retailers.

Whether small, independent, out-of-state retailers will be required to collect sales tax depends on their business model, according to Robert Blanco, a legislative aide to Hancock.

“Amazon has a business nexus with the state because of the subsidiary companies they maintain in California,” Blanco said. “If these small e-tailers are similar, then the BOE [Board of Equalization] might determine they should be collecting the tax. If they have no business nexus, then they would not be compelled to collect.”—Andrew Asch