TOP NEWS The California Internet Tax Law and Unintended Consequences

Story by Benjamin F. Kuo


Last night, Gov. Jerry Brown signed into law a bill which taxes Internet retailers if they have California affiliates, a move which looks to have major impact on local companies who use Internet affiliate marketing. As part of that,,, and a large number of e-commerce retailers have cut off their California affiliates, saying that they will immediately stop paying them for referrals due to the move.

This morning, we spoke to Thomas Swalla, the COO of Santa Monica-based, the online coupon and deals site, to talk a little bit about how the move has impact at one of Southern California's many, many affiliate-dependent Internet businesses--and how the move might result in lost jobs, and the firm moving out of state.

How did the tax move last night affect your business?

Thomas Swalla: Certainly, a majority of our business model is directly affected by this. I think there are two things going on. One, is the issue of whether Amazon should have to collect sales tax for California. I have my own personal opinions, but from a company stand point, that's neither here nor there. However, the reality, is that the law, as it is written, tries to force Amazon and others to pay taxes here. The law says--because you have a relationship with, that gives us right to claim nexus over you. It's not just online business, it's also brick and mortar retailers like Cabela's, which just told us they're terminating our affiliate relationship too. That nexus says that you have to collect sales tax from California residents when they sell items to them. That was the purpose of the law.

So what actually happened?

Thomas Swalla: Unfortunately, the way it got implemented in California, is that those retailers said--you're in California, we understand you passed this law, which says you have a nexus in California because of the relationship with, so we're just going to end all ties with all of our affiliates in the state. We've already gotten several termination letters from those companies, which impacts our business pretty dramatically. In other states, Connecticut and Illinois, they gave 60-90 days before the actual bill went into effect. That gives you time to plan a little better. But this literally happened yesterday. We knew it would come, but which didn't know how or which affiliate programs it would affect. We knew that and Overstock would cut off those programs, but we didn't know that folks like and Cabela's would. We're still receiving notices today.

We imagine that's quite a negative affect on the business?

Thomas Swalla: It's certainly been negative on our business. We've put all options on the table. That includes laying people off, or moving--probably to Nevada--but before we do, we want to certainly make sure we understand from the legislatures of other states around California on what their position is. If we had to pick up and move everything from Santa Monica to Nevada, we'd certainly want to make sure they didn't go make this a law too in twelve months. It is bad, and it definitely impacts the business. This is how we make the majority of our revenue--from the affiliate model. It's a little weird though, because they're claiming that because gets paid when someone buys something from Amazon, the CPA model, we are a marketing affiliate and Amazon has to collect sales taxes. However, if we were just providing clicks, using the CPC model, they wouldn't be affected. If Amazon just paid for clicks on our side, it wouldn't have any effect, but because it's CPA, it does.

It sounds like legislators didn't think through these impacts?

Thomas Swalla: To me, the frustrating thing is that while talking to people in Sacramento, this was incredibly predicable. In every other state that this has happened, they didn't collect any additional taxes, business left the state, and there was a net negative effect. It's very predictable. I think maybe if you're not in the business day to day, you don't understand that. I think most lawmakers were thinking that California is too big, and they wouldn't just end their relationship with 20,000 companies. But yeah, they just did, and it was an easy decision.

Did the lawmakers not just understand how companies would be affect?

Thomas Swalla: I think they just don't understand the consequence. The spirit of getting Amazon to collect taxes from people in California makes complete sense. But, the way it actually got implemented had some unintended consequences. Those companies just said--we won't pay the taxes, and we'll end those relationships. Not only will the state not get more revenue, it may actually lose revenue, if what happened in Illnois happens here. If you saw what happened in Illinois, there were a number of companies--CouponCabin and FatWallet--who actually moved out of state after the bill passed. That might be what happens here. If technology business relocate, the industry will end up suffering. We haven't gotten through all the numbers, although it won't put us out of business, it will certainly affect us in a real negative way.

How long do you think it will take your firm to figure out your plans?

Thomas Swalla: I think it wil probably take us sixty days. That will let us see clearly the effect after the law has passed, see if anything else happens in those 60 days, and also give us time to collect those termination notices. We've received around eight so far, and expect more to come. So we'll see what the financial impact of those are. It might be that we'll be able to enter into CPC relationships with some of those advertisers, in which case the law will not apply. We just want to make sure we don't overreact before we say we are going to move. But, it certainly is a real possibility.

Thanks for helping to illuminate the issue here, and good luck...


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