Calbuzz Op-Ed: Online Sales Tax a Bad Deal for CA


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.

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There are 4 comments for this post

  1. avatar tegrat says:

    Having read the previous guest editorial, I must say their argument seems stronger than the one posited above. Just because similar legislation failed in other states is not an indicator that it’s a bad idea. Heck, we passed single-payer healthcare financing legislation two times in CA only to have it vetoed by Arnold! More often than not, the “business” interests are contrary to the interests of the people, even when the “business” is just John Doe selling V!@gra on the internets and filing a schedule C.

  2. avatar zurda says:

    I read the other one first, as well. Although usually in agreement with Jean Ross and CPB, in this case I find myself asking, “What about the people?” and “Will the Legislature ever get serious about doing their job?”

    Californians are already suffering from high unemployment, a dysfunctional real estate market, soaring prices for higher ed, etc. I believe Ms. Madigan’s premise that California affiliate marketers will suffer a large drop in business if this “nexus tax” happens. I never bought into Arnold’s insistence that any tax increase (or even terminating loopholes and giveaways!) on business or the wealthy would lead to their leaving the state in droves. (http://www.community-wealth.org/_pdfs/articles-publications/state-local-new/report-lynch.pdf – see p. 44 ff). Large national online retailers who are determined to avoid collecting sales tax will think nothing of pulling their business – adding to unemployment, reducing state income tax collections, etc.

    While I personally would vote to extend current tax rates, I also know that having to add virtually 10% to every purchase I make means I purchase less.

    Speaking of extending tax rates, the very same people in the Legislature who refuse to deal with the drop in revenues due to the economic collapse (in any way other than to slash and burn programs more needed now than ever), refuse to let the people decide if they’d rather extend the rates or see more draconian cuts.

    This contorted proposed method of trying to force out-of-state online retailers to collect CA sales tax is a desperate, and no doubt well-meaning, attempt to get around the roadblocks put up by Legislators who choose a rigid ideological pledge over sensible effective governance in a time of crisis.

  3. avatar mdp says:

    Interesting argument – enforcing the law will cost jobs.

    Just think how many jobs we have lost as a result of our enforcement of our drug laws. We could vastly expand the California economy if we were to allow unfettered trade in opiates.

  4. avatar chrisfinnie says:

    Because I own a business and have made online purchases, I got a note from the state that I needed to pay taxes on anything I bought that the vendor didn’t collect them. My bookkeeper said some of her clients were just lying. But I paid her to research it, and then sent the state $200 for back taxes. To tell the truth, I hadn’t noticed the vendors had not charged me tax. Nor did I realize I owed it if they didn’t.

    But, unlike larger corporations who do nothing but try to avoid taxes, I paid. Not because business has been so great. Far from it. But because it matters to me whether I live and work in a functioning state.

    I want roads that don’t knock my filling loose, safe food and water, somebody to track professional licenses so I can feel more secure that the services they provide will not injure me, fire and police to protect me. All these services and more are important to me as a resident and as a business owner.

    Unlike Chevron, my business is not making record profits. But because the state of my state is important to me, I paid up. I recommend other businesses do the same.

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