Last week I received an email from Amazon notifying me that they would be ending their affiliate programs for any publisher that resides in California. If you haven't been following this issue, you might be surprised by the news surrounding this story. For me, the biggest surprise is that the State of California, home of Silicon Valley and the heart of Internet innovation, could find itself going down such an idiotic path.
What's Behind the Anti-Affiliate Tax Law
In theory, sales tax rules are supposed to be pretty simple -- if you buy something from someone, then the state gets the merchant to collect a percentage based on that sale. Of course, the actual laws are much more nuanced than that, but that's the principle in a nutshell. When it comes to buying stuff on the Internet companies like Amazon have essentially said, "we don't have any operations in the state, so we're not going to collect sales tax on sales that get shipped to states that we don't have operations in." In that way, Amazon and many Internet businesses have used operational location and sales tax to strategically eek out some competitive pricing advantages.
As states like California find themselves sinking deeper into a revenue hole, victims of the crappy economy and the economic catastrophe macro forces, they're scrambling around looking for any sort of revenue life raft that they can cling to and might float politically. It's worth noting that this whole situation is exacerbated by the anti-tax Republicans and their jihad against government -- they've taken the ship of state hostage and will blow it up unless we all fly to anti-tax fantasy land.
The Challenge of Taxing Internet Sales
Over the past ten years, more and more people buy stuff over the Internet. Often, people will go to brick and mortar retailers, look at products, then price-shop to find the lowest price and order it online. That includes no sales tax and free shipping. It's unfair to local merchants and it's just one of the reasons why we've watched local specialty retailers become an endangered species. But the problem isn't Amazon or the Internet, it's that as the world grows flat, interstate and international commerce lines become incentive zones.
The problem isn't the Internet. The problem is that now, for many items that you purchase, the point of sale approach to tax has undergone the same transformation as local newspaper classified ads. In short, it doesn't make sense as an instrument of revenue generation. Instead, it becomes a disincentive for businesses to attempt to compete in brick and mortar businesses in local markets unless there is an inescapable local component to the product or transaction. This legislation is like trying to tax Craig's List in order to subsidize the world's local newspapers.
Since businesses like Amazon don't have operations in the state, the state decided to change it's tax code to consider Affiliate marketers to be "operations" any money paid out as a sales commission, as though, by publishing links to Amazon products for sale, we bloggers and web site publishers are suddenly different from publications that run print advertising. Consider, what's the difference between a print advertisement and an affiliate advertisement except compensation at a Pay Per Click level instead of what's basically a PPM advertising model in the print world?
By attempting to use affiliate marketing as the lever into online transactions, California closed the books on the Amazon affiliate program -- and anyone in California who received income from this (and payed corresponding state income tax based on this revenue). Essentially, they just killed some number of Internet-based jobs. And they knew that it wouldn't work. Prior to California signing this into law, Amazon has actually shut down the Associates program in Illinois, Hawaii, Connecticut and North Carolina because of similar legislation.
The Heart of the Problem
While the anti-tax Republicans might want to look at this and wave it as a "taxes are job killers" bloody shirt, the real root of the problem goes back to this Republican anti-tax anti-government jihad. California has been in this budgetary hole for many years. From the state's education system to our social infrastructure, we watched as so many of the institutions that were the gold standard for the US and the world deteriorate under the influence of the greed-heads that only want to ask, "why should I have to pay for that?"
In this case, it didn't matter that the law doesn't work because California state government can't discuss possible solutions that might work. They can't negotiate raising revenue with the anti-tax terrorists. Instead, this budget driven law was more like Maxwell Smart trying to balance the budget and stop the impending explosion with yet another attempt to push out the problem a bit longer. "Would you believe several hundred million dollars in tax revenue from internet sales tax on Amazon? Would you believe several million Farmville bucks? How about a couple of free items in World of Warcraft?"