How the Tax Will Affect California Bloggers and Internet Marketers tax, board of equalization, affiliate marketing, bloggers, internet marketingLast week, Gov. Jerry Brown signed a new law dubbed by critics the “ tax” which aims to collect tax on thousands of California online purchases.

The law would require online retailers like to collect sales taxes on purchases if they have online affiliates within California. Affiliates are websites or blogs which advertise certain Amazon products and receive a small commission when readers click through the ad and purchase the product.

As a reaction to Gov. Brown’s signing, followed through on its prior threats and immediately pulled the plug on its relationship with 25,000 of its California-based affiliates.  (Full disclosure: this website was one of those 25,000 affiliates.)

Although other states have passed similar measures in recent years, California’s law differs in two significant ways, as explained by Stu Woo in the Wall Street Journal:

California’s law also includes the affiliate provision, but it has two other components. One lets the state collect taxes on a retailer that—either by itself or through a subsidiary—designs or develops products sold by the retailer. The other component of the law is what is known as a “long-arm statute” that would allow the state’s Board of Equalization to determine which businesses must collect sales taxes in the state.

Because California’s law differs in these two significant ways from other states, it may take some time before the legal issues are resolved.

Critics Attack New Law

The law unleashed a torrent of criticism and commentary both in favor and strongly opposed to
the measure. Blogger Pat Flynn, who runs the popular Smart Passive Income blog, wrote:

Personally, I’m upset at both the state legislature and Amazon. The state for imposing the tax, and Amazon for retaliating by terminating the loyalty they previously had to affiliates, who really are what made Amazon who they are today.

One of the main criticisms is that the bill violates a federal law that dictates that online retailers don’t have to collect sales taxes in states where they lack a significant physical presence.  An Amazon spokeswoman, Mary Osako,  told the New York Times “This legislation is counterproductive and will not cause our retail business to collect sales tax for the state.”

How the New Law Will Affect Bloggers and Internet Marketers

I am definitely sympathetic to the thousands of bloggers and internet marketers who find themselves the latest victim of California’s nightmarish, ongoing budget woes. I have written before that these entrepreneurial folks  who have found a way to eek out a living using affiliate commissions have been one of the few bright spots in our dismal economy in the past few years, and it doesn’t make any sense to single them out now.

There are a lot of open questions at this point about how the new law will affect these thousands of bloggers and Internet marketers. Of course, in the immediate future, the reality is that has totally eliminated their affiliate program with no plans to re-start it, so thousands of bloggers and internet marketers will no longer receive any commission checks.

However, Amazon has promised to pay out all commissions earned up through the point they cancelled the program last week.

Some bloggers have speculated about setting up an out-of-state LLC or corporation so that there is no longer the “nexus” in California.

However, I believe that the California Board of Equalization (which collects sales & use taxes in California) is going to try to cut off that strategy at the pass.  The BOE issued some guidance on this issue on Friday. (Additional full disclosure: I once worked for the Board of Equalization.)

The BOE’s guidance states that the new law includes “any retailer entering into an agreement under which a person” … “for commission” … “refers potential purchasers of tangible personal property to the retailer.”

I read that as saying that as long as there’s a “person” who is located in California who is referring business to the retailers, then the tax applies.

So, let’s take the example of a blogger named “George” based in San Francisco. If George were to open up a new Delaware or Nevada-based LLC for the purpose of having a legal entity located outside of California, he would still be a “person” based in California referring people to, and therefore subject to the tax.

In short, if you’re a blogger or internet marketer living in California, it’s unlikely setting up a legal entity based in Delaware or Nevada or some other state is going to be a good long-term solution. Before acting on that, I would wait for further interpretation of how the law would affect such out-of-state entities.

Tax Bill Due in October

It’s unlikely these issues will be resolved soon.  The Board of Equalization will bill Amazon and other online retailers at the end of the current quarter, based on estimates provided by Amazon or through the BOE’s own projections. Amazon has said they will not pay the bill. Then it will be the BOE’s move.

Given the questions regarding the viability of the new law, I’d say the final chapter in this story has yet to be written. I wouldn’t be surprised if one of the parties involved (most likely Amazon) files suit to prevent enforcement of the law, delaying its enactment.

Unfortunately for thousands of affiliates, that means a longer wait before a resolution.

See my previous post on this same topic:  Is the “ Tax” Coming to California?” (I guess we know the answer to that question now.)

Like this entry? Sign up to receive the latest updates via RSS feed or email. Or check out the “Best of” California Law Report.

John CorcoranJohn Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County).  He advises clients about real estate/land use, general civil litigation, and small business matters.  He can be reached at  (415) 250-8131  or [email protected]


Photo credit: Flickr/