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California Settlement Changes Game for Internet Sales Tax
By Cliff Ennico 

Thanks to a new law in California, the days of selling online without having to pay sales tax are numbered. 

Since 2008, a number of states have attempted to impose their sales taxes on Internet commerce, most of which involves sales across state (and often national) boundaries. 

States try to tax e-commerce in a number of ways, but the approach that’s gotten the most publicity is the so-called “Amazon tax” adopted by New York, Rhode Island, Illinois, North Carolina and a couple of other states. In these states, Amazon.com, Overstock.com and other e-commerce platforms that allow small businesses to sell on their sites as “affiliates” are required to collect and remit state and local sales taxes if an affiliate sells more than a certain dollar amount to residents of that state each year. (The annual threshold is normally $10,000 to $20,000, although it’s only $5,000 in Rhode Island.) 

The theory is that affiliates of e-commerce platforms are “agents” of the platform and are therefore subject to state “nexus” laws taxing out-of-state companies that operate through in-state employees or other agents. Pretty creative, no? 

The reaction to these laws has been straightforward -- Amazon, Overstock and other effected retailers (eBay sellers are not considered affiliates of eBay, so the tax isn’t a concern for them) have simply terminated their affiliates in Amazon-tax states rather than comply. 

Earlier this year, California attempted to join the fray, imposing a $500,000 threshold on sales by California-based Amazon affiliates, but Amazon fought back. The company spent more than $5 million to launch a public referendum to stop California’s Amazon tax law and ban collection of sales tax on online sales in California. Rather than face a law banning taxes on Internet sales, California negotiated a settlement with Amazon which was signed into law last week. 

Under the terms of the settlement: 

- Amazon will drop its referendum challenge; 

- California will defer enforcing its “Amazon tax” until September 15, 2012, and even then will enforce it only for Amazon affiliates who sell more than $1 million to California residents; 

- Amazon has pledged to create at least 10,000 full-time jobs and hire 25,000 seasonal employees in California by the end of 2015; 

- Amazon will reinstate its California affiliates, estimated to number between 10,000 and 20,000; and 

- California will forego any sales tax owed by Amazon affiliates for the period since the original Amazon tax law was passed. 

So far, pretty uncontroversial. 

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