Amazon Shuts Down Affiliates in Response to California’s Use Tax Law

As you probably know, sales tax is typically not assessed on internet sales crossing state lines.  Under the Supreme Court’s Commerce Clause doctrine, states are generally prohibited from requiring out-of-state retailers from collecting “use” taxes for sales to in-state residents.  However, an exception exists where such retailers have a sales force, plant, or office in the state.  While it is not entirely settled whether independent contractor “affiliates” such as those Amazon uses establish the requisite “nexus” permitting a state to mandate retailers to collect use taxes, California is giving it a go:

Gov. Jerry Brown has signed into law California’s tax on Internet sales through affiliate advertising which will immediately cut small-business website revenue 20% to 30%, experts say.

The bill, AB 28X, takes effect immediately. The state Board of Equalization says the tax will raise $200 million a year, but critics claim it will raise nothing because online retailers will end their affiliate programs rather than collect the tax.

Amazon is already shutting down its California affiliates. Amazon attempted to fight the state of New York on the constitutionality of a similar use tax a few years back, but lost in the trial court because of the existence of New York affiliates.  Governor Jerry Brown and Senator Hancock and Assemblyman Skinner obviously knew this was coming.  This is a power play.

Here’s an interesting comment from a small Amazon affiliate about the practical impossibility of collecting use taxes:

I am a tiny online retailer. In order to collect sales taxes for jurisdictions outside of my own, I would have to do the following:

1. Setup an account with each and every state, county, and municipal jurisdiction with a sales tax.

2. Report sales taxes monthly or quarterly with each and every jurisdiction even if my sales in that jurisdiction during the reporting period is $0.

3. Determine all of the jurisdictions that every shipping address I have is contained in.

4. Understand all of the tax rates and exemptions and exemptions to the exemptions.

5. Keep up with the changes in tax rates, exemptions, exemptions to the exemptions, and arbitrary boundaries that form jurisdictions for each and every jurisdiction in the country.

This is effectively impossible.

Similarly, as Patrick Byrne,’s CEO observes:

There are 7,200 taxing jurisdictions in the United States. In some jurisdictions, cotton candy is candy. In some, cotton candy is food, and food and candy have different tax rates. A company in Utah, for example, cannot sit here and know the right way to tax every possible product in Paducah, Kentucky. It is impossible.

Some legal analysis on this story is in the works.

Tim Kowal

Tim Kowal is a husband, father, and attorney in Orange County, California, Vice President of the Orange County Federalist Society, commissioner on the OC Human Relations Commission, and Treasurer of Huntington Beach Tomorrow. The views expressed on this blog are his own. You can follow this blog via RSS, Facebook, or Twitter. Email is welcome at timkowal at


    • It makes sense if we’re going to have sales tax, online retailers should have to pay. But it’s unwieldy for states to impose a multiplicity of obligations on them. Amazon’s and Overstock’s CEOs, to their credit, have both expressed support for the Streamlined Sales Tax idea. I’m sure they don’t WANT to pay the taxes, like anyone else, but there is a legit, non-greedy reason to oppose use tax laws like California’s and New York’s.

  1. What is that legit non-greedy reason?

    Yes jurisdictional issues are very important but another important purpose of a nexus test, as it apply to taxes, is to ensure that municipalities do not over reach and impose taxes on persons who do not sufficiently benefit from the state. Imposing taxes on purely out of state retailers who have no presence in the state is over reaching imo. The domicile of a buyer alone should not be, nor has it historically been, sufficient nexus to trigger a taxable event.

    Legal justifications aside, the obvious truth is that state governments are feeling the pinch and want a cut of business they’ve never been allowed to tax before.

    • Maybe I misuderstood. I tend to agree if you mean the *states* are being greedy here. On the other hand, states *have* been constitutionally empowered to assess a “use tax” on goods purchased from out-of-state retailers. I think the reasoning is pretty lame: “using” or consuming a product in-state is itself a cost on the state’s resources that warrants the state taking a cut in the form of a use tax. The difference has been that states have not been empowered to conscript the out-of-state vendor into assessing and collecting the use tax on the state’s behalf. That’s why we see California asking its residents in their tax returns to estimate their online purchases and their resulting additional use tax obligation. Yeah, good luck. The absurdity of that attempt is, in my mind, a tacit admission by the state that it is not entitled to ask the online retailers to collect the tax directly.

      • I think we see eye to eye Tim Kowal. And I must say, your eyes are very beautiful.

    • You’ve got it exactly backwards. Sales and use taxes are levied on the buyer, not the seller, that kind of blows your whole analysis up.

      The legit, non-greedy reason is that the ease of tax evasion that comes with not being able to enforce compliance on certain sellers results in an unfair subsidy to the customers of out-of-state sellers, with the burden of that cost falling on the compliant taxpayers and businesses.

      • The buyer is liable to *pay* both sales and use taxes, yes, but the retailer generally may only be lawfull required to *collect* sales taxes. The state has to enforce remission of use taxes some other way. Such as the honor system, which is about all they can do.

        • I’m not sure what the disagreement here is, unless it’s whether or not internet purchases are subject to sales taxes or use taxes.
          I reported on this issue some when I was a business journalist and the conventional wisdom from all sides seemed to be that they were subject to sales, not use taxes, but no one I talked to was a lawyer, either.

          • My understanding is that sales and use taxes primarily differ in the manner in which they are assessed. Sales taxes are assessed/collected at time of sale by the vendor, who has to report and send a check quarterly. Use taxes, by contrast, are collected from the consumer through annual tax returns. Obviously better for vendors if they can avoid having to incur the costs of collecting for and transacting with the taxing authority. This is why internet retailers eschew laws like California’s new one, and why wholesalers like to do business with those with a reseller’s ID so they can delegate the collection and reporting obligations. Not to mention, it’s better from a marketing perspective to be able to sell goods without taxes applied at POS (even if the tax liability on the consumer is technically the same).

  2. Re: ” comment from a small Amazon affiliate ”

    This person has obviously never worked with a regulatory bureaucrat, who would look at their litany of complaints and say “I look forward to seeing you file your tax statements, since you obviously have a very clear idea of what’s involved in that process.”

  3. why to go mr brown (notice I didnt say governor you actually have to govern for that title) let see the state is broke we are losing small and big businesses due to over regulation and absurd tax policy so what do you do create more absurd tax policy and drive more small and big businesses out of our state! way to go a$$. do all us californians a favor and quit leave our state and never come back…people lets fix our nation by voting for ron paul 2012!!!! as far as california’s government its done broke and cant be saved we need to rise up and topple this dictatorship in sacramento but how is the million dollar question…. I purpose everyone quit work and all flood the unemployment offices no income tax no government right?!?!

  4. Well, if they won’t leaglize and tax marijuana so we can smoke our way out of the deficit, I guess we could shop our way out…

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