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|CA Sales Tax Law & Affiliates|
Many CA Affiliates May Soon Lose Income
Not too long ago CA targeted digital downloads:
Now they're making a money grab for affiliate income with proposed bill AB 178:
|“This legislation will close the current loophole in California tax law which has allowed out-of-state companies to avoid collecting California sales and use tax,” said Assemblymember Nancy Skinner (D – Berkeley). “During this unprecedented fiscal crisis we cannot afford to lose sales tax revenue from out-of-state companies when our own local businesses are struggling to keep their doors open.” |
So apparently Nancy Skinner doesn't realize that there will be a backlash against California affiliates just like there was against New York, and she'll be costing her constituents that earn affiliate income their livelihood.
Additionally, that affiliate income we earn is spent in CA, sales tax paid in CA on goods, and paid in CA income tax but they probably can't quantify this money (our income) so we'll all be hung out to dry in favor of other people's jobs.
One interesting emotional talking point she makes to rile up people to support this bill is this lame argument:
|Independent booksellers have been hammered by unfair tax competition from Amazon for over a decade. |
The booksellers are going the way of the dinosaur for the same reason the newspapers are, not because of taxes, but because online booksellers have more inventory, more available topics, and last but not least books are, just like newspapers, making the shift to all digital being read on a wide variety of devices including Amazon's Kindle.
Why are digital books an important point?
See the first link above, CA doesn't tax digital downloads!
So as the disruptive digital technology becomes even more pervasive to the book reseller market this latest attempt to collect income won't do squat except cost affiliates resellers their income.
What's the bottom line?
All California affiliates will be whacked across the board. just like with the New York tax, so that Amazon and other larger online resellers can continue to sell into California TAX FREE unabated.
That's right, California will collect NO NEW TAXES and in the end LOSE INCOME TAXES (and sales taxes) from the income we can no longer earn in California thanks to CA affiliates being shunned nationwide.
Nice try but you're going to cost many people and the state money and not earn a penny.
You mean email isn't taxed in the United States? We've had sales tax on Email in the EU for years. (Directive 77/388/EEC)
|Wait until they want to tax email. |
Running Surpluses is Stealing
According to California's Comprehensive Annual Financial Report (CAFR), it had a surplus of near $60 BILLION dollars oin 2003. Any of you folks good in financial statements should ask for their recent CAFR and see for yourself.
California, and many other states, could abolish tax altogether and use billions of dollars in TRFs (retirement funds) they hide from general public.
Don't let them make you sheeple.
|Both Google and Yahoo! are in CA. Could this have any ramifications on paid search? |
Not really, they already pay taxes on profit in states where they have physical locations.
|But candidate B is on your side on other issues - pick one (abortion, homosexual marriage, environment, cell phone use in cars, cutting government spending, etc.). |
Abortion, same-sex marriage, cell phone use in cars, nor the environment have a direct impact on my revenue. AB 178 does. Maybe some people call it greed; I call it self preservation.
In almost every election, we have to pick and chose between issues. There is never going to be a candidate that 100% completely agree with (nor do I think there will ever be a candidate that I 100% agree with, unless I run for office). Like every decision in life, we weigh the options, assign various weights to the issues, and try to come up with a final decision where the pluses outweigh the minuses.
|it had a surplus of near $60 BILLION dollars oin 2003 |
Apparently you don't understand the language of politics. A "surplus" means a green light for politicians to increase spending. In case you haven't been watching the news, today's economic environment is vastly different from 2003. Tax revenues are WAY down from bankruptcies (less corporate tax revenue), companies moving out of the state (less corporate tax revenue), layoffs and downsizing (less individual tax revenue), and the collapse of home values (less property tax revenue). Meanwhile, state spending has almost doubled since then! Even the most recent "balanced budget" was based on unrealistic revenue figures that won't be seen again until long after the current economic crisis (if ever).
As far as the retirement funds go, the stock & real estate markets have wiped out close to 50% of the value from 2003 (if not more). Yet the required future payouts from that fund have not gone down.
|Both Google and Yahoo! are in CA. Could this have any ramifications on paid search? |
Not really, they already pay taxes on profit in states where they have physical locations.
But the issue is that their advertisers do not currently pay CA sales tax as a result of their advertising. But the proposed law would create a CA nexus, which would force them to collect and pay CA sales tax, and most likely force them to stop advertising on Google and Yahoo. So YES, this bill COULD have serious ramifications on paid search!
OK, if I and my site/server are outside of CA and I decide to advertise on John Doe's web site, I don't know where John Doe is located and to be honest I don't really care, all I care about is the fact I get a lot of worldwide sales through advertising on the site.
I assume now, I have to find out the exact location of every site I advertise on and pay sales tax if applicable in their state?
I find it hard to believe that California needs even more tax money. They already have a state income tax on top of your federal income tax.
I really dont think this will fly since it's infringing on interstate commerce and it would be impossible to enforce. What they could do as a state is basically have duty fees for products coming in from out of state.
here's an interesting read about interstate commerce.
So we will all just have proxied websites or tell Cali to shove it.
An email out of california containing a link to a NY site sent to someone in any other state shouldn't cause triple taxes any way you look at it. (CA + NY + buyers state).
When this spreads to other states it will become near impossible to track clearly.
We are having a lobby day at the Capital on March 31st. If you want to help, let me know and I can put you in touch with the organizers.
We also are trying to collect as many CA affiliate marketer's signatures as possible for a big group letter. I'll let you know when the letter is up and ready for sigs. Should be today or tomorrow.
Also of note, Hawaii had their hearing on a similar bill yesterday and it passed. :-(
Minnesota has their hearing on Thursday.
This is spreading like wildfire! But we have a chance to stop it in CA - a similar bill was stopped last year. If we can stop CA, hopefully it will stop other states from starting action.
[edited by: Catalyst at 7:13 pm (utc) on Mar. 24, 2009]
Mods- can Catalyst post a link to the online signature page?
So if this passes do I drop California based affiliates? Or write California checks for sales taxes in the state whether or not I have affiliates in CA for goods shipped there?
|So if this passes do I drop California based affiliates? |
Most likely a lot of merchants will do exactly that, based on what happened in New York last year.
|Or write California checks for sales taxes in the state whether or not I have affiliates in CA for goods shipped there? |
If you have even 1 affiliate in CA, my understanding is that would be enough to trigger the nexus clause and require you to charge CA sales tax (and then spend the time and hassle to remit that money to CA).
If you do not have any affiliates in CA, then you are probably okay. However, if you advertise with Google or use any affiliate network based in CA (like Commission Junction), they could consider that a nexus as well.
Has Google or Yahoo released any comments on this yet?
This scares the heck out of me and I'm glad to see so many people stirred up about it.
Mods: I know links aren't usually allowed but I hope you'll allow these as they are so important to all of our livelihoods...
If you're a CA resident please sign the petition here to stop this madness:
You can read the text of the bill here:
This is serious stuff that could really screw all of our businesses. Even if you're not in CA please see if there's anything you can do to spread the word. Also keep a watch out on your state too.
Minnesota, Wyoming and several other states are considering similar legislation. Keep your eyes open.
CA affiliates, we need to take action on this.
- After you sign the petition
- please call your state assembly person and tell them NOT to support this bill!
You can go here and click on the link on the left of the page which says "find my district".
I just spoke to my assemblyman's office (Paul Fong) and they were very interested and receptive. They asked me to also write a print letter stating my opinions. Please do the same...
It's not our fault the State of California can't manage their money better. It's the fault of the politicians and our leaders. I for one refuse to pay for their mistakes, and will go to whatever lengths it takes to keep my business and keep my money out of their hands.
Even if it means moving to the Cayman Islands or any other foreign country that is deemed a "tax friendly country". At this point, and after the atrocities commited by our government over the past 10 or so years (I can reasonably quantify going back 20 years, but that's another story), I don't think I would have too hard of a time pledging my loyalty to a foreign country outside the US.
Our government has shown us time and time again that they care less about the "average joe" and more about "big business". I love the US, but this is nothing like our forefathers envisioned.
So either I get a normal "9-5" job where I can barely make ends meet and bow down in servitude towards the politicians and their regimes, or I move out of the country and live like a king. Guess it all comes down to your point of view of "the quality of life".
I'm sure they will welcome the tens of thousands of dollars I pump into their economy every year by just living there.
I don't think these politicians realize just how fluid we webmasters are. I can leave the US at the drop of a hat and set up shop in a foreign country that is more tax-friendly. I somehow don't think I will be hurting while typing away on my laptop while watching the hot babes on any given tropical island beach.
I wonder if California has taken into consideration the amount of tax revenue that will up and leave the state if this proposed law goes into effect?
Do the morons in our government even have half a clue of the Pandoras box they are about to open if they pass this law?
I'm only a "small timer" in the overall picture. I wonder what the webmasters who live in Ca. that make millions of dollars EVERY MONTH via their websites (and affiliate programs) will do if this law is passed? Common sense suggests they will take their websites and move out of state (along with their money).
[edited by: BaseballGuy at 7:11 pm (utc) on April 1, 2009]
|or I move out of the country and live like a king. |
It's not just a matter of moving out of the country. As a U.S. citizen, you're still subject to U.S. taxes on worldwide income. But from the earlier part of your post, it sounds like giving up your U.S. citizenship may be an option for you.
Catalyst or brizad- any word on the outcome of yesterday's mobilization?
I believe the states that collect sales tax see online sales in general depriving them of serious amounts of revenue so those states won't stop until they are collecting taxes on all sales delivered to addresses in their state, no matter what their source.
The scenario is simple if all sales-tax states fall in line .... merchants that ship products have to collect and remit sales tax on behalf of the state where the product is shipped. Period. In this day of computer automation and wide area networks this is not the challenge it used to be.
If the playing field is leveled by all sales-tax states there won't be an issue. So I'd say in the long run affiliate marketers should hope for all states to get on the bandwagon, or none. If it turns out to be all states, there could well be an affiliate blood bath from knee-jerk reactions of panicked merchants while the playing field is leveled.
With New York on board and if California pulls this off I expect it is true that the other states will have the legal models they need and will fall like dominos.
Some of the larger online merchants might see the writing on the wall and start collecting sales tax on all sales to sales-tax states even as the dominos start to fall. If that happens merchants with affiliate programs might follow suite and not be so quick to dump their affiliates.
>>It's not just a matter of moving out of the country. As a U.S. citizen, you're still subject to U.S. taxes on worldwide income
although you have recipricol arrangements with some countries, eg if you live in the uk and pay uk tax then you don't have to pay usa tax.
shouldn't have thought that applies to many tax havens though!
|although you have recipricol arrangements with some countries, eg if you live in the uk and pay uk tax then you don't have to pay usa tax. |
Wrong. If you are a U.S. citizen, you are subject to USA taxes on worldwide income. Period.
If you pay UK taxes, you can get a CREDIT against your US tax liability for the UK taxes you paid. But that doesn't exempt you from filing (and paying, if the US amount is more than the UK).
If you are a U.S. citizen living overseas, you can get an amount of overseas income exempted from US tax (just under $90,000 for 2008), with certain restrictions.
I probably should seek the advice of an attorney before I do anything rash like renounce my citizenship...
But my original threat of moving out of California stands if this bill is passed. I sent my Representative an email stating the same.
Does anyone know the proposed tax amount? 1%? 5%?
I would like to calculate how many $100.00 sales would have to be taxed by the State of California in order to make up the amount of tax revenue (goods, gas, housing, etc) that is lost by me moving out of state. This includes what I make at my normal job, and what I pay in state income tax at the end of the year.
This obviously would not be a one-time deal, as every year California would need to tax "x" amount of sales in order to make up for the income lost on webmasters leaving Ca.
I'm guessing it is astronomically high....and I'm just a small-timer.
Wonder how much they will lose on the California webmasters (that move out of state) that make above 2k, 5k, 10k, 15k, 20k a month...
I personally know one guy who operates a website that pulls in around 100k a month. He told me that if this bill passes he will leave California as well.
[edited by: BaseballGuy at 2:21 am (utc) on April 3, 2009]
|Does anyone know the proposed tax amount? 1%? 5%? |
It's the existing state sales/use tax (that just hiked up another 1 to 2%, depending on where you live, on April 1).
[edited by: LifeinAsia at 3:22 pm (utc) on April 3, 2009]
Has Google or Yahoo released any comments on this yet?
I found this copy of the letter from a coalition [cj.com] of major CA companies and organizations, including Google, Yahoo, and eBay. It also includes some non-CA companies like Overstock.
"And more importantly, have there been any studies showing how much revenue they have LOST because of it (from people/businesses moving out of [NY] state)?"
NY's tax problems are not from businesses moving out of state due to taxation. Our businesses moved out of the country entirely in order to cut labor and make more money for shareholders. I have seen it right here in the small city where I live. But our biggest tax income loss in this state has been the collapse of Wall Street. This is where the biggest piece of our tax income was coming from after the shift from manufacturing as a base starting way back in the seventies. The disappearance of manufacturing from the US has nothing to do with taxes and everything to do with shareholder profits.
NY is not using tax money for "nonsense." Medicare is one of our biggest tax expenses because upstate has a huge aging population. Prisons is the other huge chunk, as we have a gigantic prison population due to the draconian drug laws we've had for decades. 1/3 of our prisoners are in for non-violent drug offenses.
If the difference between making a profit and not making a profit is having to pay sales tax, maybe your business model is faulty. You should probably start cutting out "fluff."
|If the difference between making a profit and not making a profit is having to pay sales tax, maybe your business model is faulty. |
I think you are misunderstanding the whole thread.
Having to pay sales tax has nothing to do with profit. If you have to pay sales tax, you pass that on to the consumer. The only affect on profit is the extra overhead you incur by having to track and remit those collected taxes.
If you have to charge and collect sales tax just because you have an affiliate who happens to live in New York, that puts you at a competitive disadvantage compared to your competitor who has no New York affiliates. Most of your customers will eventually move to your competitor since he doesn't have to charge sales tax.
Another issue where it directly affects profits is for those affiliates who live in New York and are suddenly cut off from their revenue because the advertisers (like Overstock.com or Amazon) drop them to avoid the nexus issue shown above.
If I lived in New York and 100% of my revenue came from affiliate programs and 90% or more of that revenue disappeared overnight, then instead of starting a whole new business I would more likely consider moving out of New York so I can regain that revenue. And I am sure that I would not be alone in that decision.
After I moved out of New York, New York would then be getting 0% tax on my revenue.
So if all the online companies dumped their New York affiliates to avoid the nexus issue, New York would not gain any more revenue from taxes. But they would certainly lose tax revenue from affiliates moving out of state. Yes, this is an extreme example. That's why I was asking is there are any statistics out yet comparing the gained tax sales tax revenue versus the lost tax revenue from affiliates moving out of state.
The extra overhead? How much of your profit do you think that would be? And why would that extra overhead not also be tax deductible as a business expense?
If the company you are making money off dumps you, and that is the totality of your business, yes, you are in trouble. But you already were, were you not? Before that even happened. You put all your eggs in a teensy tiny little basket.
I keep hearing about how businesses are moving out of NY because of high taxes here. That's why when you go to Manhattan, it is completely empty and there are just newspapers blowing down the street, no massive stores or huge gobs of people or traffic jams or skyscrapers owned by corporations. Same with California. All the businesses left to move to somewhere affiliate-friendly, like Alaska. The whole place is empty.
If affiliates have any trade associations, perhaps they might collect the kind of stats you are talking about. Is there even a category on tax forms to indicate that you are an affiliate?
|The extra overhead? How much of your profit do you think that would be? And why would that extra overhead not also be tax deductible as a business expense? |
For someone who has never had to deal with sales taxes before and having to completely rewrite the coding on their site to take it into account, I would imagine it would be quite a bit of overhead. As well as the extra work each quarter or month (or however often you have to do it) to file a report and remit the collected taxes).
And having a tax deduction for the expense never comes close to the situation where the expense didn't exist in the first place. (If it's a choice between saving $200 in taxes from a $1000 expense or not having the expense in the first place, I go for option 2 and be up $800!) For a lot of businesses, that money probably would have been spent elsewhere for something that would also be deductible. The issue is that instead of spending that money to grow their business, they have to waste that money and time on compliance issues that should not be required in the first place. And that puts them at a competitive disadvantage compared to those companies that aren't subject to collecting the taxes simple because they don't have a CA nexus.
|If the company you are making money off dumps you |
We're not talking one company. I have no idea how many companies besides Overstock dropped their NY affiliates (which is why I was asking the question). But I seriously doubt they were the only one. (Okay, did a quick search and found at least 56 as of May 2008.)
|Is there even a category on tax forms to indicate that you are an affiliate? |
What relevance does this have to anything?
"I highly doubt affiliates in California will be dropped by their advertisers. "
Amazon has said they will drop affiliates in Hawaii and Maryland if the bills pass in those states. You can see the letter they sent to Maryland legislators at AffiliateTip.
If they drop affiliates in CA and other states that pass a bill (if they do) I predict the large majority of sheep, err… I mean, other online retailers will follow suit.
It's getting scary out there!
[edited by: Catalyst at 10:10 pm (utc) on April 9, 2009]
Wow, there are a lot of misstatements in this discussion thread. I'll try to respond to many different issues in this single post.
I'm opposed to California's AB 178, but I don't think it's helpful to falsely claim that it would impose California sales taxes on transactions that aren't sent to California residents. It doesn't do that; AB 178 only impacts transactions where the customer is in California.
But although it doesn't seek to force collection of California sales tax for shipments to other states, neither is it limited to the transactions generated by paid referrals; if the law applies, it requires the merchant to collect sales tax on all shipments to California residents. This is a "gotcha" law.
As written, the bill would impact all merchants who pay Google, eBay, Yahoo, Commission Junction, ValueClick, or any other "California resident" company for referring traffic -- if their total sales to California triggered by this traffic exceed $10,000, then they would need to compute, collect, report, and remit California sales tax for all shipments to Californians. The bill is expressly not limited to commission-based payments; it includes any payments for traffic to refer potential customers.
One of the bill's primary supporters, the American Booksellers' Association, quotes the bill's sponsor (Nancy Skinner) as promising an amendment that would clarify that the bill doesn't affect "advertising." This might be why the bill's hearing date was postponed from April 13 to April 27, but no amendment has yet been proposed. (Skinner's claim that the bill doesn't target "advertising" is absurd -- commission-based advertising is the primary "hook" the bill uses to try to snag Amazon.)
The fact that Google and Yahoo already pay California income taxes is not a factor in any way.
The New York law and the nearly-identical bills pending in California, Maryland, Minnesota, Tennessee, Connecticut, Hawaii, and North Carolina, are all unconstitutional, and will eventually be stricken down by appellate courts. But that might not happen for several years, and in the interim, merchants will need to deal with these laws (by collecting taxes for each state, by terminating their relationships with affiliates in these states, or by adopting very expensive and time-consuming practices to document that the law does not apply to them).
Amazon's and Overstock's lawsuits challenging the New York law were dismissed by a New York trial-court judge (in New York, the trial court is called the "Supreme Court," which has confused many people who assume that the law was affirmed by an appellate court).
Finally, I had also assumed that because Amazon "rolled over" and began collecting New York sales tax, it would do the same in California. However, Amazon has informed the legislatures who've held hearings (in Hawaii and Maryland) that Amazon intends to terminate affiliates in those states, if the bill passes.
It's possible that Amazon's DTM-PPC announcement last week (that it will prohibit all "direct-to-merchant PPC" activity by affiliates) was intended to be a partial response to these laws. New York's tax agency has adopted a very restrictive interpretation of the law, basically saying that the law doesn't mean what it says, but instead only requires companies to collect sales tax if their affiliates engage in activities that arise above the level of ordinary advertising, and instead engage in "solicitation" activities (such as DTM-PPC or email marketing).
These bills are generally referred to as the "Amazon Tax" because they would almost certainly draw more new sales taxes through Amazon than through all other merchants combined. If Amazon takes actions so that the law doesn't apply, the entire purpose of the law will be undermined.
No matter what happens, though, if these laws pass, hundreds of merchants will terminate all their advertising relationships with web publishers in these states. (Surprisingly, Fingerhut has already terminated affiliates in Connecticut because that state's bill appears to be retroactive to April 1; even though it hasn't yet been enacted, Fingerhut didn't want to risk being "caught" by a "gotcha" ex-post-facto law, so it pre-emptively terminated all its Connecticut affiliates.)
Has the vote on this bill been postponed until April 27th?
Yes, the hearing was rescheduled, and is currently scheduled for April 13 (in Sacramento).
Um.... April 13 is today. Typo?
Oops, yes, the hearing was rescheduled to April 27, which is the final opportunity for bills to be considered by the Assembly Rev & Tax Committee (so it will be a very busy day).
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