Thursday, June 30, 2011

What happened to the Amazon and Cabela's ads?

I am one of thousands of people who got screwed out of blog income yesterday by the state of California.

What happened? It's a complicated story, but I'll try to boil it down here:

I was enrolled in affiliate programs for and Cabela's. What that meant was if you clicked on any of my Cabela's or Amazon links or widgets and bought something - anything - I got a commission on that sale.

It wasn't huge income for me, but it was for some bloggers. And personally, I'll take anything I can get for the enormous investment of time I put into this blog.

But both programs cut me off yesterday because of something California put in its new state budget.

If you do much shopping online, you may have noticed that some online retailers don't collect sales tax on your purchases. The reason is this: A 1992 U.S. Supreme Court decision - Quill v. North Dakota - said that states can't force remote retailers (back then, this meant mail-order companies) to collect sales tax on purchases unless those retailers have a physical presence in those states. This principle is referred to as nexus.

The reason for the decision is that there are something like 30,000 distinct sales taxes in the United States. Most states have one, and sometimes counties and cities slap on an additional sales tax. The Supreme Court basically said it was too much of a burden on retailers to force them to collect taxes for all 30,000 taxing entities.

Instead, states have had to rely on their residents to voluntarily disclose the amounts they spent on goods that weren't taxed by retailers, and pay taxes on those amounts. And - you guessed it - most individuals ignore that requirement. That means states are losing out on substantial amounts of tax revenue.

So, how did California screw me?

To pass a sorta balanced budget, the Legislature declared that online retailers' affiliates - people like me - constitute nexus, a company's physical presence in our state, and therefore all retailers with affiliates in California must collect sales tax on purchases by Californians.

This is, in all likelihood, unconstitutional, but Amazon and Cabela's didn't sit around waiting for a favorable court decision; they said, "Screw that," and promptly fired all of us. They didn't even wait for the new law to take effect at midnight tonight - they cut us off yesterday.

Before I logged off last night, I noticed blank spots where I'd had Cabela's ads. Meanwhile, all the Amazon links were still there, which meant Amazon was still making money off of me, despite the fact that I could no longer make money off of Amazon.

Nice, eh? Yeah, I've already started stripping out the Amazon links.

Here's the funny part: I've paid income taxes on my Amazon and Cabela's income, so California has now lost that income tax revenue. Brilliant, eh? And yes, the Legislature KNEW this would happen because Amazon made it clear (and Amazon has done this in other states that have passed similar laws).

Fortunately for me, Cabela's and Amazon aren't the only affiliate programs out there. There are others that actually have a physical presence in this state, so they aren't butt-hurt about the new California law - they're already collecting sales taxes here.

The only question is whether my readers will patronize them the way they have Cabela's and Amazon.

© Holly A. Heyser 2011


NorCal Cazadora said...

And if you're wondering how I know all this background and why I didn't link to authoritative sources, as I often do, it's because I used to cover tax policy as a reporter, and I am deeply familiar with Quill and its implications.

NorCal Cazadora said...

Oh, that's just great. Now Sportsman's Guide cut me off too.

Albert Quackenbush said...

This is getting ridiculous! I have been looking into this very thing and now it isn't going to happen. Thank you CA gov't.

jryoung said...

Taxes and hunting stuff, could there be a better blog post for this tax accountant?

This has been coming to a head for a while now. From a state perspective it makes sense, and I can see why they did it (all typical Government bashing aside). You'd prefer your citizens bought from local busineeses, supported local communities and in turn fed the Beast. That sounds great in a Utopia, but we're a greedy bunch many of which prefer anything as cheap as we can get it.

From an online retailer perspective the task is gargantuan. Understanding the sales tax implications across the country is a ridiculous task. Companies like Vertex and Sabrex do a fair job of creating viable software, but to reach the depths that a company like Amazon does is nearly impossible and a regulatory nightmare.

I doubt CA was able to quantify the loss of income tax revenue for those that make profits by acting as a rep, but my guess is that it pales in comparison to the potential sales tax revenue gained (even with the cut coming).

This isn't the end of this, and there will be some ebb and flow as government slowly adapts to the new markets.

As for myself, I'm dissapointed in the decision. I am an occassional Amazon buyer for books and digital media or odds and ends. But, for most goods I largely prefer buying from a local small business, even at the price premium. Particularly for my hunting and shooting goods. I'd rather have a good rapport, be on a first name basis with a local store than save a few bucks any day of the year.

Gretchen Steele said...

Holly - that explains the lack of any affiliate type thing on my blogs - Illinois screwed us some time ago in this regard... oh let's face it..Illinois' approach to government has just made it darn near unlivable here. I have seriously considered using my kiddos address in MO and trying to base my blog "business" there. (But I know the legal beagles would not approve)
Now Illinois expects me to go back and tally all of my online purchases that I didn't pay sales tax on in the previous five years and ante up.. who are they kidding? I shall stop because you are focused on California.. but let this hell in a handbasket state I live in serve as a loud warning to you....

Gary Thompson said...

The solution is simple, and addresses more than just this event..... move.

Anonymous said...

Right...moving will help.

Sales taxes on Internet purchases are coming to every state that has a sales tax. Amazon et al will fight them to the end and they using people who have affiliate income as pawns in the struggle. Most people who make all of their money as an affiliate funnel it through a llc located in a tax-attractive state or even overseas.

I'd actually prefer that Amazon give us the option of paying the sales tax. That way I don't have to worry about it.

I do agree that determining sales tax is a nightmare. If it would at least align by zip code it wouldn't be so bad, but it's a huge mess.

Anonymous said...

Actually, it's a even little more complicated than that. California re-defined "Nexus" to include all affiliates like yourself. Previously, nexus required a physical presence within the state. This new definition gets around this. It maybe, might could stand up to supreme court muster.

And, yes, if you can incorporate your business in Delaware, California may have now leverage.

No matter what, you are damaged and could sue the state all the way to the surpreme court to find out!

I am not a lawyer nor do I play one on TV.

Phillip said...

Color me ambivalent, but there ya go. On the one hand, I'm sorry for the folks who are losing out on the affiliate program money. That sucks, and you're pretty much stuck in the middle.

But on the other hand, I can understand the state's desperation to collect that sales tax. Things are bad, and I have no doubt the uncollected sales tax dwarfs the income tax CA gets from the handful of honest folks who actually report it.

What I don't understand is how a company like Amazon, with some of the most sophisticated user profiling and marketing applications on the Web, can't come up with a solution for calculating localized sales tax. Instead, they cut their losses by cutting their affiliates. Something doesn't jibe.

Blessed said...

How frustrating.

Anonymous said...

On the up side, your site loads a bit faster....


Shotgun Kat said...

Two things: why can't they just simplify tax law for online retailers and make an average sales tax up? Say 5% across the board - no matter where you have your physical address? I feel like all the government ever does is cut their nose of to spite their face...

I mean, look at the serious disadvantage the government keeps putting itself at with these regulations on tax and especially sporting goods/hunting goods. MOst people are probably unaware of this, and its an interesting little factoid I learned in hunter's safety class about 4 years ago, but, did you know that there is a certain percentage of sales tax (across the US) that goes to parks & recs everytime camouflage is sold or licensed? Whether its sold at Macy's or Cabela's. In fact a portion of all sales tax on sporting goods goes to support our parks & rec. So the more restrictions they place on expensive sporting equipment (like guns and ammo) the more money the government is losing out on and then making us pay in non-fun, non-job generating ways like upping our car registration fees. SO LAME and frustrating.

Ryan Sabalow said...

I was trying to explain to my editor how this stuff works and I see I failed miserably. I'm gonna send her your post.

jryoung said...

@Phillip, if you ever thought income tax law was confusing, sales tax is twice that. There are service providers out there (Vertex and Sabrex) that make decent software to handle that. But, the level of detail that accompanies sales tax is nearly absurd. As an example, when I prepare my wifes sales tax return the form has calculations for every city and or county you may have had sales in. Just selling within the Bay Area will yeild dozens of different variables. A tenth of a percent here, a half of a percent there, maybe even up to an additional penny in some areas.

Now take that snap shots and spread it across the country and multiply it by the volume of sales that Amazon does. This is just for the calculation, you still have to factor in the accounting costs (specialized software and ERP), banking costs, software costs, etc. etc. The depths that this reaches is vast.

My current company sells pretty much a single product or maybe a couple of variances on it. We're just shy of about a billion in sales in the US and have estimated our annual sales tax comliance (just the cost of collecting, accounting, paying and reporting) to be well into the six figures. Much of our sales at in the millions of dollars at a time so we don't have the volume of consumer goods like Amazon.

The whole change of Nexus definition is an entire argument on it's own. If it stands up in court (doubtful) we could see a radical shift going forward because there are several industries that have avoided Nexus in a jurisdiction by similar methods (affiliates, downloads, remote sales, etc.)

Othmar Vohringer said...

Leave it to governments to come up with ever more schemes to pick our pockets. No different here in BC where the government came up with a new tax(HST). Under this new tax everything that was tax exempt before is now taxed, even the death of a person. That's right dying is now taxed too.


NorCal Cazadora said...

Aaaaand now Gander Mountain is gone too.

Albert: There are other hook & bullet options, but I believe Orvis may be the only one with an affiliate program (through Google Affiliates) and how many people do you know who can afford to shop there?

JR: I felt the same way, having covered this issue before. I really do see it from all sides, but I'm feeling pissy about getting caught in the middle. If the state's going to screw me out of money, I'd prefer that it do so directly.

Gretchen: Illinois is DUMB. Seriously, how many people save all those receipts?

Gary: The money I'm going to lose from the affiliate programs doesn't come close to what I earn in pay and ridiculously good benefits as a state employee. Oh. Hmmm. Maybe that's why the state needs more money. Did I mention that my emergency appendectomy two years ago cost me just $15? Yeah. My benefits are that good.

Anon: Good idea about giving us the option. But ZIP codes rarely match municipal boundaries, which are often what set the sales tax boundaries. You pretty much have to have a DB with every address in the United States.

Anon II: Wait, isn't Delaware where Amazon is incorporated?

Phillip: I hope it's obvious from my post that I recognize the quandary. But California isn't going to get the uncollected sales tax. That's why Amazon shit-canned all of us - to avoid having to collect it. Game over - lose, lose, lose. Cali loses income tax, I lose commission, Amazon loses sales. (But check out some of my new book links and see who now gets the sales.)

Blessed: Yep.

Jean: Yep. That's because my replacement affiliate program isn't as sophisticated and pretty as Amazon's.

Kat: When I was covering this 12 years ago, that's what everyone was saying: If the states would just simplify their sales tax codes, it wouldn't be such a freakin' burden to retailers to collect it. That alone would have been sufficient to pass the Quill test.

But the real problem is even if states could collect all the sales taxes they're owed, they'd still be hurting because of the shift toward a service economy, services generally not being taxed. Tax schemes are always based on the current mode of operation, and changes in the economy always turn them upside-down. (Much like the newspaper business, which I fled five years ago.)

Ryan: Thank you, glad to be of help. I wrote about this stuff a LOT.

Othmar: I'd be happy if governments would just tax and spend honestly. I'm a fiscal purist, which is not to say that I'm anti-tax; just that I think if you want to spend X amount of money, you should collect X amount of tax. The funny part about this move is that the Legislature balanced the budget in part with this move, but because all these companies are yanking their affiliate programs, we'll never see that revenue. So yeah, the projected revenue in this budget is a sham. Just a bullshit way for these bastards to keep collecting their paychecks (because we passed a law last year saying they don't get paid if they haven't passed their budget on time). Games, games, games.

Swamp Thing said...

Holly -

I feel for ya, but I'm in the same boat as Gretchen - Maryland pulled this swift kick several years ago.

Done deal. Every once in awhile I order from Gander Mountain (only store in our state is 2 hours away) and be giddy about the free shipping, only to get hit with 6% sales tax!