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California Startups: Legislative Emergency
90 points by kposehn on June 29, 2011 | hide | past | favorite | 55 comments
WTF?

This post is for California based startups - you may still want to read to get more info on what is going on because laws like these are cropping up in other states.

WHAT IS HAPPENING:

Last night I was informed that Governor Brown will sign into law the California state budget, including trailer bill ABX1 28 (text here: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0001-0050/abx1_28_bill_20110615_amended_sen_v97.html )

This bill is commonly known as an "affiliate tax"; it establishes "nexus" (an in-state presence) for online retailers that are out-of-state if they are working with affiliates in the state of California.

WHO IS AFFECTED BY THIS:

This bill will get you if you qualify for any of these points:

1. You gain any revenue from an affiliate program such as Amazon Associates, any merchant out-of-state in Commission Junction/LinkShare/GAN, etc.

2. If the total amount of sales you have generated for the merchant in the previous 12 months before the bill is signed exceeds $10,000 OR the merchant in total has sold over $500,000 of merchandise to California customers period.

3. If you do not have a fixed IO (Insertion Order) where the merchant specifically asks to advertise on your site and does so with a fixed budget and amount to be spent (this is still shaky, I'm currently getting advice from my lawyer on this).

There are more factors I'm getting from my lawyer today, I'll post them as they come up.

WHAT IT WILL MEAN:

This bill will be signed into law on Friday apparently. As California is under a Fiscal Emergency, the law will take effect IMMEDIATELY. The moment it is signed, any merchant that has a relationship with you that qualifies in the points above will be immediately subject to fines and/or legal action.

This will result in the immediate loss of any further revenue you would gain that qualifies.

WHO SPONSORED THIS JUNK?

This trailer bill is the roll-up of three separate bills introduced in the California legislature this year:

1. AB153, Sponsored by Nancy Skinner, Berkeley. She has tried this bill every single year for 3 years. She has no grasp on the effect this will have on her own constituents (startups in Berkeley) and doesn't care. Bill text: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0151-0200/ab_153_bill_20110627_amended_sen_v97.html

2. AB155, Sponsored by Charles Calderon, East LA. This is another version of the bill above, the guy who put it forth has no clue about how the internet works from what I can tell. Bill text: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0151-0200/ab_155_bill_20110502_amended_asm_v97.html

3. SB234, Sponsored by Loni Hancock, Berkeley. This one is the worst of all, as it could qualify any manner of online presence/contracting/advertising as nexus. This thing is nuts and Loni Hancock has literally no clue how this works and doesn't care a whit about the effect it will have (she said as much). Bill text: http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0201-0250/sb_234_bill_20110209_introduced.html

These bills have been heavily lobbied by Wal-Mart, Target, Best-Buy and Home Depot. They created the "alliance for main-street fairness" to push these bills. The irony, that they helped kill main-street and profess to be helping it, is sickening.

OH HELLS BELLS WHAT CAN I DO?

Get the word out. There is literally no time to waste. Every single startup that relies on income that qualifies can be affected horribly by this. Tell everyone, I don't care how, just spread the word.

Write it on your blog. Make phone calls. Get to the tech blogs if you can. Do anything and everything in your power. The situation is dire and while we only have a whelks chance in a super nova to change this, we have to try.




I like Amazon a lot. (Currently a Prime customer and have a California-based site that makes a small trickle in affiliate fees.) I want taxes to be low or non-existent.

But the cross-border sales-tax exemption is broken in the modern era. There's no reason to give such a big de facto price advantage to distant retailers. The infrastructure that makes a state's residents good Amazon customers – high-paying jobs, spacious homes in attractive communities with full utilities, roads for overnight deliveries – needs to be paid for with broad, low taxes on all who benefit.

Amazon benefits. And Amazon has multiple California subsidiaries.

Amazon hasn't argued against 'Use Taxes', so it's not like they're making a principled stand that states have no legal right to this 8-10% of the purchase value. Amazon just doesn't want to collect it, which essentially helps their customers evade a legal (but usually-ignored) Use Tax.


Thing is, Amazon and pretty much every other online retailer supports the streamlined sales tax. It isn't about not collecting it; it is about the reporting requirements which are quite frankly nuts.

It isn't really about fair share in the end. These laws are pushed by big-box retailers that just want to hurt the advertising efforts of online retailers. SB234, the worst of these bills, didn't limit it to just affiliates - almost any manner of electronic presence would qualify, including Google Ads and web hosting.

Now, that said, I do want to see the tax codes revamped. You just can't do it this way because it is unconstitutional (it violated the commerce clause) and because it gains no revenue in the end (affiliates are terminated or just leave the state). This bill is supposed to close a budget gap but it will instead cost the state in lost income, payroll and property taxes from the businesses that leave.

Not to mention the lawsuits that will inevitably follow to challenge it....


The current situtation is sustained by Congress, which is where it should be fixed/addressed. As a bonus, this would seem to clearly be 'inter-state' commerce so no arguments about an expansive commerce clause interpretation if Congress does act.

Here is an effort to reign in the insanity of thousands of different tax rates: <http://www.streamlinedsalestax.org/>;


Yep, streamlined sales tax is the way to go. Everyone wants it - Amazon, Overstock and pretty much every online retailer.


> Amazon hasn't argued against 'Use Taxes', so it's not like they're making a principled stand that states have no legal right to this 8-10% of the purchase value. Amazon just doesn't want to collect it, which essentially helps their customers evade a legal (but usually-ignored) Use Tax.

I don't believe that is quite correct. I recall Amazon stating that they are fine with the idea of collecting use taxes for states their customers are in, IF IT CAN BE DONE REASONABLY.

Here's the problem--it is almost impossible to figure out reasonably what the right tax amount is. Let me illustrate for one state. My employer is in Washington, so we have to collect tax for sales to Washington residents. A given customer is subject to the state wide sales tax, their county's sales tax, their city sales tax, and possibly taxes from other districts.

In total, there are nearly 3 million tax "locations" in Washington. There is a table available from the state that gives the total tax rate for each of these locations.

The "location" boundaries do not necessarily align with zip code boundaries, so the only completely accurate way to determine the tax rate on a customer is to get their street address and look it up in another table the state provides, which lists every valid address in the state and its tax rate. Looking up addresses is very hard, because people often give addresses in some form that doesn't match the official form of their address. You need to deal with things like people who live on "Martin Luther King" street saying they live on "MLK" street, or just "King" street (and of course there are "King" streets that are not "Martin Luther King" street...).

So we cheat, and go by zip codes. If we have the zip+4, we take the highest rate of any location that overlaps that zip+4. If we only have the 5 digit zip, we take the highest rate of any location that overlaps that. This likely means that for many customers we are charging them more tax than we actually have to. We could try to be more sophisticated, and perhaps figure a weighted average based on population information or something like that--that would be fairer to the customers on average, but would probably not convince the state auditors that we collected enough tax, and that results in having to pay up what the state calculates and they always seem to err on the side of more tax.

Now multiply this by 50 if you have to collect for every state. You'll have auditors from 50 states demanding you justify the amount you are turning in. You greatly increase the chances that some customer who happens to know the tax rate for his exact location will get pissed that you charged him too much and will make trouble.

You'll have 50 different databases you'll have to download at least quarterly, and some more often whenever the legislature fiddles with taxes. They'll probably be in almost as many different formats.

It would simply be a nightmare. A big company like Amazon could probably handle it, but it would be annoying for them. For smaller companies, like ours, where there is one person dealing with sales taxes, it would be a nightmare. So I'm very very very glad Amazon is fighting this.

This HAS to be handled on a national level, with either one rate per state to collected by out of state internet sellers, or one rate per 5 digit zip code, and the rate data needs to be available from a single source, and if a state or locality changes a rate other than once a quarter, the requirement to collect the new rate should not go into effect until the quarter boundary.


It's not that hard. Amazon runs Target.com... for which it collects sales tax for every state where Target has a physical store. So it's already a solved problem.

Smaller business could easily outsource this determination; even if every address in the country had its own sales tax rate that's still a tiny database by modern standards.

Still, simplification is a good idea, such as your suggestion there be one rate per state for outside retailers. Perhaps having to face the patchwork would motivate online sellers to lobby for that improvement. Right now they're still shooting for "0%" and I think they have to lose that battle before the necessary simplification can occur.


Amazon and Target are parting ways in the next couple of months. Perhaps the timing of this bill is related, albeit unlikely.


Why shouldn't the sales tax be paid in the state the item was sold from? I am still wondering how the destination owns the merchant.


I think it would be fair to split it origin/destination 50/50.


All fair points, but let's get out of the clouds of idealism and look at the actual effects of the law.

This law will move start-ups out of California without raising a single penny in new revenue. It may actually decrease the tax base by moving income out of the state!

So, yes, if you want CA to 'make a stand' to prove a point, fine -- but it makes no pragmatic sense for anyone.


Many states are now acting on this same issue, so the number of places a start-up could flee to is rapidly dropping.

New York, Texas, North Carolina, Colorado, and Illinois are definitely out. And Amazon already collects sales taxes for North Dakota, Kansas, Kentucky, and Washington.

So if your start-up is so sensitive to affiliate revenues you'll avoid all those states, have fun wherever you wind up. I suppose Portland remains a nice spot – no Oregon sales tax at all.


I think you're confused -- Amazon has affiliates in both Washington and New York; affiliates in those states are fine. And so are affiliates in the states that already collect sales tax that you list -- which makes me think you don't understand the issue at hand.

Add in the 5 states that don't charge sales tax, and there are plenty of great options to locate a business.


You're right that I was confused about the effect of being in a state where Amazon already has to collect sales tax. (I was thinking of tax-minimizing consumers, rather than the affiliates). When Amazon has a presence that requires them to pay sales taxes in any case, they have no credible threat to end affiliate payments. So, it's safe to remain an affiliate in those places. A happy result for Amazon, affiliates, and the States, apparently.

California and others want that same deal.

In New York, Amazon threatened to pull out but is temporarily paying sales tax (some reports suggest into escrow) and maintaining the affiliate program pending a legal challenge. Amazon may yet wind up losing their challenge, in which case they would have to decide whether to treat NY like other states where they collect sales tax – which would render being an affiliate safe – or to follow through on their affiliate freeze-out.

New York has essentially chosen the same course as California, so it will likely be resolved the same way in both states. Other states, likely including Texas and Massachusetts pending current legislative battles, are following this approach as well.

My point is: this isn't just a California-shooting-itself-in-the-foot situation, and a company can't just jump to anywhere-but-California to get back into the affiliate program. Many states, including many other top tech and business centers, are treating Amazon the same as California.


Just to clarify - Amazon has DROPPED its affiliates in most of those states. In CO in particular (a state I know more about than any of the others), they sent a letter to all affiliates immediately terminating their association with Amazon as soon as the law was announced. Much as they just did with California.

Simple fact is, affiliates don't meet the definition of a "nexus" in a state, as determined by the Supreme Court in the early 90's. This is just a quick money grab by a lot of bankrupt states, who are counting on Amazon to just bend over and take it. Unfortunately for them, they're actually winding up costing jobs and income tax revenue for their state, instead of increasing sales tax revenue.

New York and Washington AMZN affiliates are fine, because Amazon recognizes that it has what meets the legal definition of a "nexus" in those states, and therefore needs to collect sales tax revenue - affiliates or not.


Colorado is in the process of repealing the law - a bit of good news there :)


A perverse incentive of the current situation is that Amazon is prevented from having distribution warehouses in California even though that is where much of their stuff is shipped. How many jobs are we losing now and how much extra CO2 is getting spewed into the air because of this nonsensical tax exemption?


It is not Amazon, it is the Constitution; admittedly politicians are already ignoring a lot of other pieces of it...


It is one interpretation of Constitutional language, that hasn't been construed to say states can't tax these same purchases via a Use Tax. Only that states can't require an entity with no local presence to collect the Sales Tax.

Subsidiaries and affiliates are reasonably a local presence.

Congress should act; it definitely has the Constitutional power over interstate commerce and has been derelict on this issue.


We were expecting this and were already preparing to relocate out of California. Since our team is largely virtual, switching to Washington as our primary place of business is very easy -- just a few documents and a new address. California in no way benefits from this -- in fact I think they just did Seattle and other tech communities a big favor.


Exactly. I pivoted my business away from being an affiliate successfully and now plan to eventually leave this state. No sense in staying in a state that is blatantly hostile to it's own economy.


This story (biz leaving CA) is all too common these days.


Amazon will cancel their Affiliate program for California if this happens, just got this email:

http://pastebin.com/yRLUf0Zg


Yeah, the affiliate termination notifications are already rolling in today. Got a bunch already.


So I realize this opinion will be unpopular, but the tax nexus issue is huge and really is unfair. California residents are legally obligated to pay sales tax on online purchases from out of state, but of course, no one does because Amazon et al have gone out of their way to avoid having to collect it. They effectively get a free ride, tax-wise, which just forces the taxes to go higher everywhere else.

The big box stores you mention obviously have an interest in all this, but it genuinely does hurt the local mom and pop's too.

It really needs to be fixed federally, though, or you get the kind of nose-cutting behavior you see from Amazon. Losing California from their affiliate program would hurt more than the states that came before.


I agree with the federal point - it needs to be solved there. The mom and pop businesses that get hurt though are hurt far more by Wal-Mart et al, not Amazon.


Yes and no. In some places, certainly. In lots of urban California, not at all. Not a Wal-mart in sight, but lots of local shops and plenty of Amazon customers. As a rational shopper, your best course of action for anything over $100 that you don't need today is to check it out in the local store and then buy it from Amazon. Kinda sucks for the folks stuck maintaining storefront and inventory to have to do so with an almost 10% handicap.


Today, California forced Amazon to terminate its advertising relationship with me. Today, I lost 26% of my advertising revenue. Amazon will not suffer as a result; California will not benefit either.

Unfortunately, we've known this was coming for several weeks; it was included in the budget partly to placate local booksellers and big-box retailers (Wal-Mart, etc.), but primarily to falsely claim $195 million in additional revenue (as part of about $4 billion in "smoke and mirrors" revenue claims).

Of course, everyone knows that won't happen: as expected, Amazon terminated its advertising relationships with California web publishers today, so the $100 million of sales taxes that the state "expected" from Amazon is gone. The remaining "expected" revenue will follow, as Overstock and a hundred other out-of-state merchants terminate Californians from their affiliate programs.

It's wrong that Amazon and other out-of-state retailers don't collect sales tax in all states with sales taxes. But this law doesn't address that problem at all.

This topic has been widely discussed on ABestWeb.com over the past three years as similar laws were enacted in New York, North Carolina, Rhode Island, Illinois, and other states. Except for New York, none of these states have collected additional sales taxes from the laws.

My blog post today: http://blog.lessonindex.com/2011/06/california-forced-amazon...


Can someone explain this for people who are not familiar with the way these affiliate programs work? Were people not paying taxes on affiliate revenue and would now have to start? Or is this a tax on the end customer buying from Amazon (which would be forced to collect CA sales tax)? How do either of these impact startups in CA? Does this impact businesses registered in DE that have an office in CA?


Here's the way it works:

You have a startup and part of the way you monetize is by having affiliate links on your site or in your product.

Affiliate links are given to you when you join an affiliate program. The merchant you work with agrees to pay you a percentage of every sale or a fee for some action. When someone clicks on one of the links on your site and buys something, you get paid a commission.

The US constitution commerce clause basically says that the merchant is not obligated to collect sales tax if they do not have a physical presence in the state (otherwise known as a nexus). That means that if you live in Utah and sell to a customer in California, and you don't have any physical offices or presence in California, you don't have to collect sales tax.

The responsibility of reporting sales tax for online transactions falls to the citizen of California who is obligated to report it on their tax return. They seldom do.

The law about to be passed in California would designate any affiliates as a nexus for out-of-state retailers, requiring sales tax to be collected. This violates the commerce clause as it is not specifically included (in short violates the spirit of the law and is not defined clearly in the letter of the law).

This impacts startups and businesses in California that make revenue from any of these affiliate programs. Two high profile startups I know of are TheFind.com and Shopobot. A big affiliate (I went with one of the founders to lobby to help kill these bills) is Ebates.com. Each of these has offices in California and would be hurt by this bill. Apparently Shopobot is headed out of state (someone from there posted today about it), as is Ebates (to my knowledge). There are about 25,000 businesses that are going to be really harmed by this legislation and they really have no choice but to leave.

I believe this bill will qualify even if your company is registered in Delaware but you have an office in California. I'm still getting legal advice on this, but it doesn't look good.

The general result of bills like these is that the affiliates or businesses leave the state to protect their income and the state loses out on the tax revenue. Net effect is typically a dive in the tens to hundres of millions in tax revenue. Illinois is a great example where several companies with hundreds of employees left the state.

Hope this helps you get a clearer idea :)


Minor correction: Congressional authority for taxation derives from the "Welfare Clause", Article I, § 8.


Thanks for the note :)


Can you post the phone #'s for these reps? This is awful. I want to personally contact all their offices and voice my complaints.


Here's Nancy Skinner's contact info from her web site (she sponsored AB153 and has pushed for these taxes for 3 years in a row):

Capitol Office: State Capitol P.O. Box 942849 Sacramento, CA 94249-0014 Tel: (916) 319-2014 Fax: (916) 319-2114

District Office: Elihu Harris State Building 1515 Clay Street Suite 2201 Oakland, CA 94612 Tel: (510) 286-1400 Fax: (510) 286-1406


Here's Charles Calderon's contact info, taken from his site (he sponsored AB155):

Capitol Office: State Capitol P.O. Box 942849 Sacramento, CA 94249-0058 Tel: (916) 319-2058 Fax: (916) 319-2158

District Office: 13181 N Crossroads Parkway Suite 160 City of Industry, CA 91746 Tel: (562) 692-5858 Fax: (562) 695-5852


Loni Hancock's contact info taken from her web site (she sponsored SB234, the worst of all the bills):

Capitol Office Phone: (916) 651-4009 Fax: (916) 327-1997 State Capitol, Room 2082 Sacramento, CA 95814

District Office Phone: (510) 286-1333 Fax: (510) 286-3885 1515 Clay Street Suite 2202 Oakland, CA 94612


Here's the web sites for each one:

Nancy Skinner: http://asmdc.org/members/a14/ Charles Calderon: http://www.charlescalderon.com/ Loni Hancock: http://dist09.casen.govoffice.com/

Go nuts!


Thanks everyone! I called and talked to all of their offices. If you do the same please remember to be as nice and honest as possible. It doesn't help our case if we're rude. (The staff who took my calls were very nice, btw).


UPDATE

Brown just signed the budget trailer bills, including the affiliate nexus tax. I just went into effect immediately.

That's that I guess.


Affected companies will end their affiliate programs so they don't have to pay the tax. This means that the state won't collect the tax revenue anyway. It's obvious that this is just a ploy by competitors (Walmart) of companies with successful affiliate programs (Amazon).


Is anyone aware of what smaller online-only merchants are intending to do (smaller players on CJ, Linkshare, etc.)? Have they followed Amazon's lead in other states where this was an issue (e.g. Illinois, Colorado, etc.)?


Yeah, a lot of them are terminating affiliates as well. The legal risk is generally too great so they go with the safest route.

Can't really blame them; the fines for violating are pretty nasty.


What's this "Amazon doesn't collect sales tax" thing? I'm in NYC and I pay sales tax on items purchased from Amazon.com.

Total Before Tax: $47.99 Estimated Tax To Be Collected: $4.26

If that's not NY sales tax, it sure looks a helluva lot like it.


You may be buying from a merchant located in NY state. Does the item you're looking at say "sold by XXX"? XXX is probably located in NY.

Amazon collects sales tax on behalf of merchants who do have a physical presence in the state.


Sort of. Amazon must collect sales tax for transactions where they sell a physical product to a customer located in states where they have "nexus" (a physical presence). These bills extend nexus to include affiliates.


Thank you, Silicon Valley, for voting overwhelmingly Democrat and bringing this and other business killing legislation here in California and countrywide.


That's kind of silly. Shall we thank you and other Republican voters for the recession?


"She has no grasp on the effect..."

"...the guy who put it forth has no clue about how the internet works..."

"...has literally no clue how this works and doesn't care a whit about the effect it will have..."

Really? Is e-commerce so weak that it can't compete on a level playing field with physical retail? Even if you think it is that weak, is it really so outlandish for people to think it can that it's worth a page of venom-filled invective? Yeah, Amazon's cutting off its nose to spite its face here, but doesn't that mean you should be mad at Amazon, not the state government?


It isn't that e-commerce is weak at all. The playing field is skewed in e-commerce's favor because it is often offering a better experience and price.

A lot of mom&pop retailers have figured this out and started selling online. They sell on Amazon and eBay and reach the entire world. Many successful major online retailers started this way.

Also, it is hard to not be upset when you go to the effort I have; I went to Sacramento and met with the politicians. I tried to change the course of this legislation. I stood up for others to try and keep this from happening. I can see the damage this is doing and how it won't gain the state any revenue at all.

I don't blame Amazon and the other retailers for what they have to do. The are faced with a decision where they can be on the hook for something that is specifically designed to muck with them. The legislation forces them to do this, not the other way around. There is a definite fiscal incentive for them to terminate affiliates; and also one for affiliate to leave the state.

In the end, tax revenue is lost by the state and the bill just forces businesses out :-/


This ignores the critique that the "better experience and price" online retail offers comes about because Amazon doesn't have to pay sales tax. This makes everything Amazon sells 10% cheaper in California, which means that even a totally equivalent experience offered by WalMart would be seriously disadvantaged.

That said, this is a very sub-optimal solution--it's lose-lose-lose. It comes down to the fact, though, that one of Amazon's key competitive advantages is being able to avoid sales tax, and no solution which is (a) genuinely achievable and (b) levels the playing field will be supported by Amazon.


I agree, it is a sub-optimal solution. However, Amazon does support the streamlined sales tax which would achieve both points. There needs to be some federal solution to make reporting easier and the streamline seems to be the best way put forth so far.


The problem isn't that it can't compete on a level price playing field, but a level tax-reporting playing field. When you live in Sacramento, and go to San Francisco and buy a sandwich, you pay the local sales tax. A store has a physical presence in one location. It collects sales taxes for once district: namely, the one it's in. Presumably at least one person works at the physical location, and can total the receipts at the end of the month, and send a cheque and associated paperwork to the state and/or county and/or city.

The problem is that California wants amazon to collect sales taxes from customers who live in California, even though they have no physical presence. This bill is saying that they do have a physical presence (i.e. someone that can send in the cheque and associated paperwork) because someone puts up a banner ad on their website and happen to live in California. It would be like Sacramento wanting the shop in San Francisco to collect additional Sacramento city sales tax because I'm from there.

Keep in mind that I'm not a CPA, and these analogies probably suck.


In substance, that's a bad analogy. If you order something from WalMart.com, you have to pay sales tax for your jurisdiction, even though it's not a physical cashier in your jurisdiction ringing it up. It ends up giving Amazon an unfair advantage, just by virtue of the mere fact that it doesn't have physical retail locations in the states it sells stuff to.


That's not really true though. When you buy things on walmart.com, you can pick them up at the store. The same thing with the sears catalogue. In theory, because they are already submitting sales tax to the state, it's no additional burden to submit more sales tax for things coming from online sales. The reason it hasn't been the case for other things, is that it's an excessive burden of the mail-order retailers to figure out the amounts, and submit different forms for every state, even though they are only located in one.


Neither of your comments make much sense. Amazon already collects tax in a lot of states so collecting in more would not be a major burden except financially.

And what kind of advantage is slogging to the store to pick up a purchase?


I think, the primary reason to be mad about this is that the law in no way helps any one. It even seems like it will end up being a law that has negative effects.

California affiliates will be cut-off by Amazon. So the affiliates either move their business out of state or they stop their business entirely. In either case, the state loses out on taxes that it currently gets from these affiliates. People buying from Amazon will continue buying from Amazon. So the local and big-box retailers do not really benefit. It is only the small subset of people who don't know about certain Amazon products and who might have come to know about them because of the various sites or blogs based on using Amazon affiliate links will now not know about these and contribute to buying from Amazon.

So it makes sense to be mad that our lawmakers are spending time and effort on a useless law during a time of budget crisis.




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