A major problem for state governments right now is that they fund themselves through sales taxes but those sales taxes typically don’t apply to online retailers without substantial operational bases in the state. So as more purchases move online, tax revenues drop. Compounding the problem is that the brick-and-mortar stores who do have to pay sales taxes are at a price disadvantage, which encourages consumers to abandon them and move their purchases online.

California, which is facing a massive budget deficit, is trying to recoup some of that revenue by charging large online retailers sales taxes. But they can only do that to retailers with some workers, facilities or offices in the states. So Amazon is pulling out. I just received this e-mail from the company, as back when I had a personal blog, I was a member of their affiliates program:


For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers - including but not limited to those referred by California-based marketing affiliates like you - even if those retailers have no physical presence in the state.

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.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.

Let’s be clear: Amazon opposes this bill because it wipes out a price advantage they currently have against their competitors. And, as the Center on Budget and Policy Priorities has explained at length, their other arguments simply don’t add up. Now, Amazon is a business, and so you can’t fault it for playing hardball in an effort to retain a competitive advantage. But this is bad policy that they’re trying to protect — it’s starving states, killing brick-and-mortar stores and encouraging a race to the bottom among states who want to attract the offices of online retailers. Brown is right and Amazon is wrong.