(July 2, 2009) Governor Arnold Schwarzenegger has vetoed California Chamber of Commerce-opposed legislation that would have harmed California online marketplaces, web-service providers and websites of small businesses and non-profits.
The legislative proposal, part of the budget package vetoed by the Governor, extended the sales tax “nexus”—requiring out-of-state sellers that pay California firms or residents for advertising or sales referrals (often through a website link) to collect sales tax on sales to California residents.
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.
Following his veto of the Internet taxation bill 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.
Harm to California Companies
Although aimed at out-of-state companies, the 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.
Driving Business Away
Last year, Overstock.com immediately terminated its affiliates advertising program in New York when it enacted a similar law. Amazon 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.
Before the Governor’s veto, earlier this week, Overstock.com had announced it was also 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 over 25,000 affiliates in the state of California, many of whom are small, entrepreneurial businesses, estimated to pay around $123 million of dollars in income tax revenue each year from affiliate advertising.
Similar Failed Proposal
A similar CalChamber-opposed Internet taxation proposal, AB 178 (Skinner; D-Berkeley), failed to move out of an Assembly policy committee earlier this year.
AB 178 is now a two-year bill, meaning the proposal is still alive, but will not be eligible for hearing and movement through the Legislature again until January 2010, the second year of the current two-year legislative session. This bill is also similar to a CalChamber-opposed ‘job killer” bill from 2008, AB 1840 (C. Calderon; D-Montebello).
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.
Californians Against Higher Taxes
A CalChamber-led coalition is continuing to emphasize to lawmakers and the public that adoption of additional taxes will have adverse consequences for the economy and jobs. More information on the radio ads being run by Californians Against Higher Taxes and a series of YouTube videos, including one featuring CalChamber President and Chief Executive Officer Allan Zaremberg, appears at www.MoreJobsNotTaxes.com.
Staff Contact: Kyla Christoffersen