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California passed legislation Tuesday, June 28, that will allow for the taxing of out-of-state retailers, which will specifically affect e-tailers. Directly following the provision’s approval, Amazon.com announced it would drop all California retail affiliates.

The new  law closes a loophole that allowed Internet retailers to not charge sales tax on purchases and comes in the wake of similar laws in six other states. Amazon dropped all affiliates in those states as well and large online e-tailers across the board followed suit, including Backcountry.com, which released this statement from Affiliate Program Manager Jeremy Curtis Wednesday afternoon in response to the legislation’s passage:

“This provision has forced us to terminate all relationships with affiliate partners located in California.  The Governor is required to sign the bill no later than July 1st, which required us to begin the affiliate removal process immediately.  If the Governor does not sign the bill all of our affiliates will immediately be reinstated.  Since the provision just passed last night, we didn't have any notice and had to take action immediately before we could give our affiliate partners notification.
We truly value our affiliate partnerships and are hopeful we can resume a successful partnership in the near future.”

In a statement to California affiliates, Amazon executives said ties would only be restored if the legislation was repealed:

"We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action."

Amazon.com and another e-commerce retailer, Overstock.com, took similar actions against North Carolina, Arkansas, Rhode Island, Connecticut and Illinois after the legislatures in those states passed Internet tax laws.

California's new Internet tax law was applauded as a measure that leveled a playing field, said state Sen. Loni Hancock (D–Berkeley).

"No longer will out-of-state online merchants be able to underprice local stores and California-based online businesses by as much as 10 percent by simply refusing to collect state sales tax. It's only fair," she said in a June 28 statement.

In our July issue, contributing writer Ryan Dionne takes a look at the ongoing battle retailers have been fighting at the state level when it comes to online sales tax. According to the article, federal law requires retailers that have only a physical presence in a state to charge in-state customers sales tax, but New York, Illinois, Arkansas and a handful of others have passed laws stating that any retailer with an affiliate in their state is considered to have a physical presence. Affiliates, in most cases, are bloggers that host retailers' ads, and in these states, online-oriented retailers like Evo, Moosejaw, Backcountry, and Amazon would rather drop affiliates than collect sales tax.

"States often look for ways for other entities to collect their sales tax for them," says Rebecca Madigan, executive director of the Performance Marketing Association. "You have to have a real physical presence, [and] there is no physical boundary with the Internet."

In states that have passed laws requiring online sales tax collection, online-oriented retailers like Evo, Moosejaw, and Backcountry would rather drop affiliates than collect sales tax writes Dionne in an article on Skiingbusiness.com:

Nathan Decker, Evo's e-commerce senior manager, says just that. Evo is predominantly online but has a store in Seattle and is looking to expand. Decker says the company's roughly 3,000 affiliates help drive about 5 percent of the company's revenue.

And of those 3,000 affiliates, about a dozen drive the majority of the sales.

However, Decker says they'll consider online-sales-tax laws when the retailer looks to open more physical stores.

At Moosejaw, dropping affiliates makes a bigger impact.

"Our affiliate program is our biggest marketing channel," Comerford says.

Its affiliates help drive between 13 percent and 19 percent of the company's revenue. However, in terms of revenue generation, of its roughly 5,000 affiliates, about 50 are meaningful and about 10 of those are really meaningful, he says.

TransWorld Business would like to know your thoughts on this issue. Do you agree with state legislation that makes it mandatory to tax out-of-state retailers? How do you see this affecting your business?