California tax law forces Amazon to withdraw associates program

Amazon has been butting heads with many states that feel the e-commerce giant needs to be paying taxes alongside brick-and mortar businesses. Now, Amazon has vowed that it will terminate its Callifornia Associates Affiliate program in response to a sales tax bill part of an effort to balance the state’s budget. The Amazon ax was just waiting for Jerry Brown to sign the bill into law, and since he’s done so, there’s nothing standing in the way of making good on their threat.

The new law, starting friday, collects sales tax when commissions are paid to Internet sites in California (affiliates) as well as from companies with a physical presence in the state. There are roughly 25,000 affiliates located in California garnering referral fees from the program.

Both Amazon and Overstock.com say that they will stop paying out commissions on those referrals. According to the LA Times, these affiliates combined paid $152 million in California income tax in 2010, but many will most likely be leaving the state thanks to the legislation. Here’s a link to Amazon tax reactions on twitter.

Amazon protests that this bill is unconstitutional. Dubbed the Amazon Tax, this piece of legislation closed a supposed loophole that allowed online companies to skirt through. In 1992, the US supreme court ruled that states couldn’t collect a sales tax on business without a physical presence in the state, which included the Seattle based Amazon company.

California officials expect to raise $317 million annually from the new budget legislation. The basic sales tax will also be dropping to 7.75% by the end of the week, so these new events may lighten the blow of Amazon pulling out. The sales tax passed two weeks ago, but Jerry Brown had vetoed the entire budget bill at the time. Amazon sent out the following email to affiliates, detailing its position and the consequences if the law become reality.

“Hello,
For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers – including but not limited to those referred by California-based marketing affiliates like you – even if those retailers have no physical presence in the state.

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect their ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. We are also working on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.

Regards,

The Amazon Associates Team”