As I noted a little over a month ago, it’s just a matter of time before we’ll all be compelled to pay sales tax on our online purchases. In fact, for Californians, that day will come later in the week.
Though California residents, like most of us, have technically been required to pay a sales (or use) tax on their online purchase all along, there was never a mechanism in place for collecting this at the time of purchase.
But on September 15th, that will all change when AB 155 kicks in. At that point, all online retailers that have more than $1M in sales to California residents in the past year and have had more the $10k in sales referred to them by California affiliate marketers will be required to collect sales taxes.
In other words, the so-called “Amazon Tax” casts a much broader net than just little old Amazon. The bit about affiliate marketing relates to how California is defining a “physical presence” (nexus) in the state. This requirement dates back to a Supreme Court finding in 1992 that held it unconstitutional for companies to be forced to collect sales taxes in a particular state if they didn’t have a physical presence there.
For those that don’t know, affiliate marketing refers to the practice of referring sales to an online merchant in return for a small fee — often calculated as a percentage of the purchase price. So even if a company is located entirely outside of California, if they have an affiliate program (and they sell over $1M/year to CA residents), then chances are they’ll be subject to the tax.
What can online merchants do about this? Not much. Once laws of this sort go into effect, the responsibility for collecting sales/use taxes will shift from the state to the merchant. For those with an affiliate program but no physical operations in the state, they could opt to shut down their affiliate programs, or at least kick out all of their California affiliates. However, in doing so, they would presumably lose a bunch of sales.
As an alternative, they could simply choose not to collect the tax from the buyers. In this case, they would be obligated to pay the taxes themselves. But given the complexities associated with tracking and collecting taxes at the time of purchase (with different treatment for different states), it might be easier to simply build the tax hit into their prices and deal with it after the fact.
It will be interesting to see how this all plays out.