Amazon tax: Helping or hurting California?

The bill will force Amazon to collect sales tax, but will likely drive out jobs and businesses

Is Amazon fighting an uphill battle against states? Last week, the California state Assembly approved AB 155, also known as the “Amazon tax” bill, which would force online retailers with in-state affiliates to collect sales tax from consumers. The approval puts the bill one major step closer to passage, but the question remains: Will it help or hurt California? California believes it will help, Amazon and other online retailers argue that it will hurt. But what about the affiliates? Where do they fit in the massive tug-of-war?

If anything, the affiliates are really at the heart of the issue, since they’re the ones that are directly affected by the legislation and online retailers’ response to it. In Illinois, for example, when the “Amazon tax” bill was passed, Amazon responded by simply cutting ties with all 9,000 of its Illinois-based affiliates. Those affiliates generated $611 million in advertising revenue in 2009 and tax revenue of $18 million. Now, with Amazon halting payments to those affiliates, the state of Illinois is likely to lose an estimated 25-30% of the tax revenue previously generated by those affiliates.

The fact is that if affiliates want to continue working with some of the biggest retailers in the world—i.e., Amazon—they have to go where Amazon goes. That was Oliver Roup’s solution when he realized that the Illinois legislation was going to cost him his relationship with Amazon. Roup is the CEO of VigLink, a Google Ventures-backed online marketing company that monetizes hyperlinks by giving bloggers a code that they install once and automatically generate revenue from any sites that link to that page. VigLink had an office in Chicago, but when Illinois passed the Amazon tax, Roup packed his bags and moved VigLink to Indiana. Simple as that.

“If you’re in Chicago, you can drive fifteen minutes and be in Indiana,” he explained.

But his response to the legislation makes perfect sense. He moved his business and didn’t lose any money or marketing clients as a result. And today, VigLink continues to work with Amazon as an affiliate. But Illinois lost one more business and all the jobs that came with it.

Unfortunately, VigLink is headquartered in San Francisco, and if the Amazon tax bill passes in California, Roup will be forced to take drastic measures.

“We stand to take an immediate hit to our revenue,” he said. “We have contingency plans in place, we’ll survive, but we think it’s bad for business, it’s bad for California, and it’s bad for tax revenue.”

Roup is weighing the options, which consist of packing up and moving out of California, or laying off some employees. While he said he is considering both options, he said he will not planning to do any mass layoffs.

All of the players in the Amazon tax game have logical points of view. The state believes that by collecting the sales tax that would normally slip through the Internet sieve in one of Amazon’s transactions, it can use that new money to reboot the flagging economy. Of course, Amazon doesn’t want to raise prices for consumers after making a name for itself as the premier online source for discounted goods. And then you have the affiliates, who don’t want to lose Amazon’s business (or the business of other major online retailers), so their inclination is to simply move out of the state.

So let’s look at this realistically: It isn’t likely that every single state in the country will individually pass this tax law. As more states pass the law, other states will be welcoming Amazon and other online retailers with open arms. On a state-by-state level, this doesn’t work. It drives jobs and businesses out of the state, and it won’t boost consumer spending if businesses are forced to raise prices.

But isn’t it only fair for states to collect sales taxes? That’s the money that California needs to help get back on its feet. The Internet is like the new frontier. Creating an online business is like trying to get a piece of the Wild West—there are few, if any regulations in place, and that’s how some Web companies are striking gold—by taking advantage of legal loopholes. Amazon is supposed to be collecting sales taxes, but it doesn’t, because the onus is put on the consumer to take the initiative to charge himself, which no one is going to do. But is that a sustainable long-term business model?

Roup pointed out that this isn’t the first time this issue has come up. In the 1990s, it was mail-order catalogs, and J.Crew and Lands’ End were the maligned targets of states’ efforts to get sales tax money. None of those efforts ever paid off, because businesses can’t be forced to collect sales tax for a state they don’t operate in.

In California, the Amazon tax bill is being pushed through on the grounds that Amazon has affiliates in California and thus has a presence in the state. It’s a weak argument, but in the midst of an economic crisis, the state is willing to grasp at straws.

Amazon CEO Jeff Bezos has argued quite simply that "the Constitution prohibits states from interfering in interstate commerce."

If the bill passes, it could force Amazon and other online retailers to man up and start paying their fair share. Or it could drive even more business out of California and its tech hub, Silicon Valley.

Image source: christianpf.com