Last week, Calbuzz ran an op-ed by Alissa Anderson and and Jean Ross of the California Budget Project arguing in favor of taxing internet sales. Today, we offer a response from Rebecca Madigan of the Performance Marketing Association.
By Rebecca Madigan
Special to Calbuzz
In California there are 25,000 thriving small businesses known as “affiliate marketers” and right now the very existence of this industry is being threatened by misguided legislation; in these economic times can California afford to lose 25,000 more businesses?
The supposition of AB 153 (Skinner) and SB 234 (Hancock) is that by implementing an “affiliate nexus” tax, California will collect additional sales tax revenue. That is simply not true.
What is true is that if these bills pass, California affiliate marketers will have their incomes devastated, and the state will collect no new sales tax dollars.
Affiliate marketers are California companies that earn income from ads placed on their websites. In 2009, California affiliate marketers earned $1.6 billion and paid $124 million in state income taxes (plus business taxes, employment taxes, etc). Legislation such as AB 153 and SB 234 guarantees elimination of these fiscal contributions.
Proponents allege that because out-of-state retailers place ads on California-owned websites they should collect sales tax. But placing an ad on a website does not constitute a “nexus,” nor does it obligate out-of-state retailers to collect sales tax in California.
This holds true for California retailers that advertise in other states – they are not obligated to collect sales tax in states simply because they advertise there.
This isn’t a loophole as some assert; it is a component of the U.S. Constitution’s Commerce Clause. The Commerce Clause protects interstate commerce and says that if a business doesn’t have a physical presence, it doesn’t have to collect sales tax for that state. Why? Because if a business isn’t located in California, it has no electoral voice in California elections, and it gets no benefit from those collected tax dollars. Our founding fathers called this “taxation without representation.”
Should any of the proposed legislation take effect, out-of-state retailers wanting to stay on the right side of the Constitution will simply stop advertising on California websites and, instead, will advertise on competitors’ sites in other states.
When that happens, the impact on these 25,000 small businesses will be devastating: they likely will see a 25-35% drop in income, which would translate into the layoff of thousands of people statewide and businesses moving to other states, or perhaps even closing. But don’t take my word for it you can view what some affiliate marketers have to say here.
Proposal such as AB 153 and SB 234 are non-starters; in 2009 the governor vetoed comparable legislation and 15 other states have rejected similar legislation. Three states, New York, Rhode Island and North Carolina, tried to implement an online sales tax, only to find such programs unsuccessful.
No additional income was generated for those states while numerous out-of-state retailers simply stopped advertising on in-state affiliate marketer websites. The states didn’t gain sales tax revenue – in fact, they lost income tax revenue. That is exactly what will happen in California if these pass. Further, George Runner, a member of California’s Board of Equalization received confirmation that major out-of-state retailers will follow suit in California should comparable legislation pass.
All California businesses and consumers are obligated to pay sales tax for online purchases where a sales tax was not collected. This is a “use tax” and has been in place more than 75 years. If use tax collection is implemented correctly, it will garner California far more additional tax revenue than these baseless “virtual nexus” schemes. Currently the Board of Equalization is making a pro-active effort to educate and collect additional revenue under California’s use tax. Legislators should focus on reliable income streams such as the use tax rather than spending time on ineffective proposals.
If AB 153 and SB 234 pass, California gains nothing and only loses; new sales tax income will not be collected and 25,000 viable affiliate businesses will be devastated. The bottom-line is this: California will lose much more in businesses closing, further job loss, businesses moving out-of-the state and reduced income state contributions than it will gain in illusory “nexus tax” gains.
Rebecca Madigan is the executive director of the Performance Marketing Association, a trade association for the performance marketing industry.