Amazon.com

Amazon has cut ties to affiliates in several states that passed online sales tax measures

On Wednesday, the same day Gov. Jerry Brown signed an online sales tax bill into law, retail giant Amazon.com severed ties with thousands of advertisers in California in an effort to avoid having to collect the taxes.

It’s a tactic the company has successfully employed in other states. But California’s law contains provisions that might make it difficult to pull off here.

In the past, online retailers without brick-and-mortar stores in California didn't have to collect sales tax for purchases here. Customers who bought things online tax-free were supposed to pay the sales tax themselves — but few did. The state collects only about $11 million each year from individuals who report their untaxed purchases when they file their income taxes.

The new law expands the number of companies that must collect sales tax for online purchases to include any business with a "nexus" — a direct connection — in California. Supporters say it will bring in hundreds of millions of tax dollars a year, but online retailers like Amazon and Overstock.com aren't having any of it.

In a February letter to California's Board of Equalization, Amazon's vice president for global policy, Paul Misener, said such measures were unconstitutional because of a U.S. Supreme Court decision that "prohibits a state from requiring sales tax collection by sellers that lack physical presence in the state."

In several states that have passed similar measures, he said, Amazon has severed its ties with local advertisers and collected no sales taxes. And on Wednesday, the company notified its more than 10,000 California affiliates that their contracts were terminated.

Amazon's affiliates post advertisements for the company on their websites and earn money when visitors click on the ads and make purchases. Any company that has such referral relationships is supposed to collect sales tax under California’s new law, with the exception of companies that sold lesss than $500,000 worth of merchandise in the state in the past 12 months.

Utah-based retailer Overstock.com has cut ties with affiliates in other states that passed similar sales tax measures, and the company's president told KQED this month that it would do the same thing here if the bill became law.

"What these legislators don't seem to understand is that in every state that's enacted such a law, we have discontinued our relationship with our affiliates, and it hasn't affected our business at all," Mark Griffin, vice president and general counsel for Overstock.com, told the Mercury News.

But the tactic has not worked in all cases. Amazon is collecting sales tax in New York — after losing a lawsuit over the matter.

One reason the companies may have to play ball in California is that the bill's text includes a litany of characteristics — besides having affiliates in the state — that prove a company is engaged in business here.

One of the criteria is having subsidiaries in the state — which Amazon does. A9.com, which provides web search technology for Amazon, and Lab 126, which does design and development for the Amazon Kindle, are both wholly owned subsidiaries of the company based in California. Other subsidiaries with offices in San Francisco include a2z and Alexa.

Assemblywoman Nancy Skinner, a Democrat from Berkeley, accused Amazon and Overstock of engaging in "bullying tactics" and said dropping affiliates would not prevent the retailers from having to collect sales tax.

"This is a great day for California business," Skinner said in a statement after Brown signed the bill Wednesday. "California employers are no longer at a competitive disadvantage with out-of-state, online-only companies. Amazon.com and Overstock.com should do the right thing and play by the rules just like our California businesses do."

Amazon did not respond to a request for comment.

According to the Board of Equalization, online retailers that fall under the law's criteria were supposed to start collecting sales tax when the bill was signed. Their first payments will be due in October.

Correction: A previous version of this story incorrectly stated that online retailers were supposed to start collecting sales tax July 1. In fact, the new law went into effect when it was signed, on June 29.