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A big tax battle is erupting in California. The immediate numbers involved are not big—about $200 million—but the principle is huge, and the outcome will have an enormous impact on our economy. The battle is over applying sales taxes to products sold on the Internet. If California gets away with its new, unconstitutional tax, consumers nationwide could be hit for billions and the economy will be harmed.
The Supreme Court ruled in 1992—as it had before—that retailers cannot be required to collect sales tax in a state where they do not have a physical retail presence. The battle back then was not about e-commerce but the billions of dollars in products sold through catalogs. For instance, if L.L. Bean didn’t have a store in California and you bought a pair of boots via its catalog, L.L. Bean did not have to charge you and then fork over sales tax to Sacramento.
Tax-hungry pols these days are eyeing not catalog but Internet retailers, particularly the biggest one of them all: Amazon (AMZN). The Golden State legislature recently adopted the so-called Amazon tax, which dictates that the Seattle-based retailer and other e-retailers must collect a sales levy on everything it/they sell to California residents and turn the proceeds over to the state treasury.
How in the world does Amazon, which has no physical presence in the state, get hit up for sales tax? This is as flagrant a violation of a Supreme Court decision as one will ever find. The legal fig leaf is Amazon’s “affiliates” program. Since 1996 Amazon has had a marketing program, whereby Web sites can offer their visitors a link to Amazon-offered products and services. These “associates” get a monthly fee for sales generated by those links. In California there are some 25,000 individuals and small businesses that are profiting from their partnership with Amazon and others. These individuals hardly constitute the definition of what lawyers call a “nexus” or a physical presence ŕ la a store or warehouse. (Amazon does have a traditional physical presence in four states and collects sales taxes from customers in those states.)
One thing I don't understand is how having an affiliate who is located in California is considered "having a presence," while advertising on adwords PPC provided by google (which is based in Mountain View) is NOT considered having a presence in California?