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California Enacts Explosive "Amazon Law"!

author photo of Sylvia F. Dion

The Golden State becomes the newest state to enact an "Amazon Law"!

That’s right! On June 29th, California’s Governor Brown signed into law, what is quickly becoming the nation’s most explosive “Amazon Law" to date. By now you've certainly heard about this significant development in the taxation of internet sales as this story has received California sized coverage.

And like an explosion that’s heard loud and clear, California’s “Amazon Law” has generated one huge reaction after another.

The rumblings started even before the law was finalized. Amazon had warned that it would sever its affiliate contracts if Governor Brown signed the "Amazon" legislation. The mega on-line retailer didn't hesitate to carry out its threat in other states that have enacted "Amazon Laws", such as Connecticut and Illinois.

But with California being the largest state thus far to enact an "Amazon Law," and the state with the largest number of “affiliates”, some wondered whether Amazon would actually follow through.

Amazon wasted absolutely no time! Even before the ink on Governor Brown's signature had dried, Amazon informed its thousands of California marketing affiliates that it would terminate their contracts stating that it opposed the bill "because it is unconstitutional and counterproductive." Amazon added that "similar legislation in other states has led to job and income losses, and little, if any, new tax revenue" and concluded that it deeply regretted that it "must take this action."

California’s “Amazon Law” became effective almost immediately - on July 1st. And staying true to its position that the law is unconstitutional, Amazon refused to become a sales tax collector for the state of California. (See "Amazon, Overstock thumb nose at California tax") Certainly disappointing news to California, as some estimates claim that Amazon’s sales to California customers could translate to more than $80 million a year in California sales tax revenues.

But the drama doesn't end here. Less than two weeks after the law become effective, Amazon had a petition for a voter referendum filed on its behalf. The petition was approved by California’s Attorney General, on Monday July 18th. What this means is that if 505,000 signatures are obtained by September 27, 2011, California’s “Amazon Law” is suspended, and therefore unenforceable, until California voters decide on whether the law should be repealed - voting which likely will not happen until June of 2012. (See comment on the referendum by Paul Misener,’s VP of Global Public Policy)

But enough with the Amazon soap-opera! California’s “Amazon Law” has implications for many non-Amazon sized companies. So let’s explore the provisions of the California’s “Amazon Law”.

An Overview of California ABX1 28

California Assembly Bill No. 28 (ABX1 28) is an expansive nexus law that broadly amends the definition of a "retailer engaged in business” for California sales tax collection purposes.

First, the new law expands the definition of a “retailer doing engaged in business” in California to include any retailer that enters into an agreement with a California "person" (resident or business) to compensate the California "person" a commission or other compensation for referring potential purchasers to the retailer's site whether by an Internet-based link or Internet website. This provision applies to retailers who, in the prior 12 months, made total sales of tangible personal property to California consumers in excess of $500,000 and paid more than $10,000 in cumulative commissions to their California affiliates.

But ABX1 28 goes beyond the typical web-linking language by further expanding the definition of a “retailer engaged in business” in California to include any retailer that is a member of a commonly-controlled group and a member of a California combined reporting group that includes another member of the retailer’s commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performs services in this state in connection with tangible personal property to be sold by the retailer, including, but not limited to, design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer. In effect, this additional nexus expanding language means that nexus is attributed to an out-of-state retailer who is a connected to an in-state corporate parent, subsidiary or brother/sister corporation (commonly-controlled/California combined group member) where the related company performs services, e.g., design, manufacturing, fulfillment, in connection with the tangible personal property sold by the out-of-state retailer.

ABX1 28 also provides an exception for passive advertising, which it distinguishes from commission based web-linking referrals. Entering the state to purchase advertising, including advertisements to be delivered on television, radio, in print or on the Internet does not create a sales tax collection duty provided the advertiser does not directly or indirectly solicit potential California customers. Finally, the new law is a rebuttal presumptive nexus law, meaning that if the “retailer” can demonstrate that its in-state affiliates did not engage in referrals in the state on behalf of the retailer that would satisfy the requirements of the commerce clause of the U.S. Constitution the new law does not apply. (See my 7/18/11 post, “Amazon Laws: The New Normal?” for more on presumptive nexus)

California's “Amazon” Law Impacts Small and Medium-sized Businesses

While it's obvious that California’s "Amazon” Laws targets large on-line retailers that lack a physical presence in their state, smaller non-California based retailers that meet the expanded "retailer" definition could find they're now required to charge sales tax to California purchasers too. The use of affiliate marketing has grown rapidly in the last few years, and companies of all sizes use California-based marketing affiliates to drive potential customers to their online stores. It's these smaller companies, these non-Amazons, that will be negatively impacted as they now have to deal with charging California sales tax at varying rates depending on where in California their customer is located. (Also see California’s Special Notice “New Registration Requirements for Out-of-State Retailers”)

Final Thoughts

California’s new “Amazon Law" – explosive indeed! Even before the petition for a referendum was filed, there were questions surrounding the law’s legality as ABX1 28 was passed only by a majority vote in both houses. These questions arose as amendments made to the California’s Constitution last year, which expanded the types of charges considered to be tax increases, might have required a two-thirds vote in both houses as opposed to a simple majority. Nonetheless, like a well-written soap-opera, this story is one that will go on for some time. Don’t touch that dial – you won’t want to miss what happens next in this California “Amazon Law" story.


Missed my last post? Catch it here, “Amazon Laws: The New Normal? Internet Sales Tax Law Update

What's up next? An Overview of Affiliate Marketing and How "Amazon Laws" Affect Small-Medium Sized Businesses (exact title TBD)

About the Author: Sylvia Dion is the Founder and Managing Partner of PrietoDion Consulting Partners LLC, a SALT advisory firm which provides SALT services to businesses in the U.S. and throughout Europe, Canada, Latin American and Australia. Since 2011 Sylvia has served as a contributor to the SalesTaxSupport blogs and currently blogs on Internet Sales Tax, U.S. Sales Tax for Foreign Sellers, and Massachusetts Sales Tax. Sylvia has written articles for State Tax Notes, Bloomberg BNA and other premier tax journals. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “Internet Tax / E-Commerce” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.


2 Responses to California Enacts Explosive "Amazon Law"!

  • Posted by Bill on July 25, 2011 5:39am:

    Brick-and-mortar businesses claim that current sales tax laws are unfair because a customer can go online to a “click and mortar” business to purchase something and easily avoid paying sales or use tax.
    But, for example, if the same customer goes to purchase it from a store with a location in their state, they have to pay the sales tax, making it difficult to compete.
    I think all parties in this debate have a valid argument. Amazon says they have no nexus or physical presence based upon the law; small businesses claim they are at a disadvantage since customers can avoid paying sales & use tax; and states lose billions of dollars in tax revenue annually. The answer lies in changes by Congress.
    Changes would be more effective and easier for businesses if they were executed by Congress, rather than piecemeal by each state, so that this burden on interstate commerce is not insurmountable. The Streamlined Sales Tax Initiative is a great start, but states have been very resistant to standardizing their laws.
    When states realize how important it is to make the sales tax collection process easier, Congress should be prepared to help simplify this taxing process by updating the
    Commerce Clause for the 21st century.

    • Posted by Author photo of Sylvia F. DionSylvia F. Dion on July 26, 2011 1:31am:

      Bill, Thanks for an excellent comment. And you're correct, all sides involved have a valid argument. I opened my first post, "Amazon Laws the New Normal?...." with exactly this same point - arguments come from all sides. They even come from the general public, some of whom believe Internet Sales Taxes are a tax ON the e-tailer (as opposed to a sales/use tax collection requirement). I really believe the debate over Internet Sales Taxes IS getting more and more heated and it will be very interesting to see if federal legislation eventually passes. As you probably know "Main Street Fairness" type legislation has been introduced on numerous occasions in prior years without passing. But I really have to wonder if this latest explosion with California will elevate this issue to the level where Congress feels it finally has to act. One thing we know for sure is that this is going to quite a fight - and history in the making! Thanks again for reply and stay with us - lots of great information coming from all the bloggers.

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