July 10, 2009

Governor’s Veto Averts Revenue Losses
from California Internet Affiliate Advertisers

Governor Arnold Schwarzenegger has vetoed California Chamber of Commerce-opposed legislation that would have harmed California online marketplaces, Web-service providers and websites of “affiliates”—small businesses and non-profits that earn money from banner ads and click-throughs.

The legislative proposal, part of the budget package vetoed by the Governor, redefined the sales tax “nexus”—requiring out-of-state sellers that pay California firms or residents for hosting advertising or sales referrals (often through a website link) to collect sales tax on sales to California residents.

Tax Revenue Loss Averted

Before the Governor’s veto, Overstock.com had announced it was canceling its Internet affiliate advertising program in California. After being contacted by the Governor’s administration, Overstock.com reinstated its California-based affiliates.

Overstock.com estimates its Internet affiliate advertisers in California create millions of dollars in revenue.

There are more than 25,000 affiliates in the state of California, many of which are small, entrepreneurial businesses, estimated to pay around $123 million in income tax revenue alone each year from affiliate advertising.

Last year, Overstock.com immediately terminated its affiliates advertising program in New York when that state enacted a similar law. Amazon.com has cancelled advertiser affiliate agreements with two other states with Internet taxation proposals, North Carolina and Rhode Island, and had threatened to do the same in California.

Coalition Opposition

The CalChamber, along with a large coalition of California employer organizations and companies, urged the Governor to veto the Internet taxation proposal. CalChamber had designated the proposal a “job killer,” as well as another proposal included in the budget package sent to the Governor, requiring business and government to withhold taxes on payments to independent contractors (see Governor Nixes Withholding for Independent Contractors).

Following his veto of the Internet taxation proposal and the budget package, the Governor said California cannot solve its budget deficit by raising taxes and driving businesses out of the state.

“After passing the largest tax increase in California history, it makes absolutely no sense to go back to the taxpayers to solve the current shortfall—that’s why I vetoed the majority vote tax increase passed by the Legislature. With unemployment at an all-time high, we should be doing everything we can to keep jobs and create jobs in California,” the Governor said.

Harms California Companies

Although aimed at out-of-state companies, the Internet taxation proposal would have inflicted significant harm on California companies. It undermined numerous ways that California companies currently survive or earn money, including: offering online-marketplace services to customers that are retailers around the globe, placing banners and other advertisements on websites, and earning commissions from placing “click-through” advertisement links on websites.

The proposal sought to establish that California “nexus” is created when any retailer enters into any referral agreement with a California resident in exchange for compensation or commission—including online marketplaces and websites—that generates referrals in excess of $10,000 in sales.

“Nexus” refers to the U.S. Constitution’s requirement that an out-of-state retailer have a sufficient physical connection with a state before the state can force the retailer to collect the state’s sales or use tax.

This change would have encouraged out-of-state retailers to instead use out-of-state online marketplaces and websites. By using out-of-state competitor Web-service companies, out-of-state retailers can lawfully avoid collecting California sales or use tax, while still reaching California consumers.

Constitutional Problems

The constitutionality of this form of attempted “nexus” has not been decided by the U.S. Supreme Court and thus could be subject to immediate court challenge under the U.S. Commerce Clause. New York was sued immediately after adoption of its “nexus” law last year and is still in litigation with no end in sight.

Coalition Against Higher Taxes

A CalChamber-led coalition is continuing to emphasize to lawmakers and the public that adoption of additional tax burdens will have adverse consequences for the economy and jobs.

More information on the campaign by Californians Against Higher Taxes appears at www.MoreJobsNotTaxes.com.

Staff Contact: Kyla Christoffersen