We can credit the California legislature with some sense in abandoning, at least for now, its plan to designate Web-based affiliates of Internet retailers like Amazon.com and Overstock.com as in-state nexuses (nexii?) and therefore subject to sales tax collection.
Up to now, in line with a 1992 Supreme Court decision, for tax purposes, a “nexus” has been defined as a physical, brick-and-mortar presence, e.g., an actual store or corporate office inside state boundaries.
As I report in my commentary today, a number of states have crafted legislation to declare any affliates–individuals and businesses that earn a commission on sales that result from clickthroughs on buttons and banners they host on their own web site or blog–a nexus. For example, a Californian who blogs about hiking could recommend trail guides to readers and provide a link to Amazon.com. If a sale results, Amazon pays the blogger a commission.
The “Amazon Tax,” as it’s become generically known, has had mixed results. Along with California, efforts failed in Hawaii and Minnesota. On the other hand, legislation passed in New York, North Carolina and Rhode Island.
Whether they will hold up remains to be seen. New York’s faces a court challenge based on the 1992 high court ruling. Their effectiveness is another question. Once consumers realize that the tax only applies to purchases they make on clickthroughs, they simply bypass affiliates, so the tax ends up punishing in-state (read constiuent) businesses while failing in its basic aim to raise revenues. According the blog, Marketing Pilgrim, some New York state affiliate marketers lost upwards of 80 percent of their income after the law was passed. Amazon severed ties with its affiliates in North Carolina and Rhode Island in order to avoid charging sales tax to its customers in those states. Everybody loses.
The California initiative stalled this year under pressure from online retailers and a threatened veto from Gov. Arnold Schwarzenegger. But the bill is not dead and its sponsors, which include Berkeley Assemblywoman Nancy Skinner, promise they will try again in the 2010 session. Stay tuned.