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California Provides Latest Example that “Affiliate” Taxes Hurt Taxpayers, Lawmakers Alike

July 14, 2011
By Brent Mead

(Alexandria, VA) – The failure of California’s scheme to dramatically expand taxation on Internet businesses proves the policy is bad for taxpayers, businesses, and even the governments that so doggedly pursue them. That’s the word from the National Taxpayers Union (NTU), a grassroots organization that has fought such laws across the country and supports repeal of California’s statute. NTU has over 52,000 members in California and 362,000 members nationwide.

“Governments that have implemented so-called ‘affiliate’ taxes on out-of-state businesses have found that revenue virtually never meets the projected targets, and may even end up costing them,” said Brent Mead, State Government Affairs Manager for NTU. “California’s insistence on passing such a counterproductive tax now threatens to damage or destroy as many as 25,000 small businesses that relied upon affiliate contracts.”

Because of California’s staggering overspending problem and persistent budget deficits, proponents of this law touted estimates that it would raise $152 million in revenue from the new tax-collection requirements. But as has been the case wherever this scheme has appeared, online retailers like Amazon.com moved swiftly to sever ties with in-state affiliates rather than submit to the bill’s onerous provisions. As a result, the state will collect little, if any, of that $152 million in revenue, while simultaneously jeopardizing the $124 million in income and corporate taxes currently generated by affiliates in the state.

In a cruel twist, the state may quite literally have cost itself directly, some of its programs, like the California State Military Museum, were Amazon affiliates who will now lose any operating income previously derived from that line of business.

NTU has long argued against affiliate taxes because they attempt to impose the burden of collecting sales tax on businesses that do not have a legitimate physical presence in the state. Furthermore, a large share of purchases made online are already subject to state sales tax collection because of the dominance of so-called “brick-and-click” retailers, like Wal-Mart or Best Buy, that have physical storefronts in addition to vibrant Internet operations.

“California continues to perform cutting-edge work on showing other states what not to do when seeking a sustainable fiscal future,” said Mead. “With yet another spectacular failure, perhaps the Golden State’s reckless policy can conclusively prove that there is no pot of gold at the end of the affiliate tax rainbow.”

NTU is a nonpartisan, nonprofit organization working for lower taxes, smaller government, and economic freedom at all levels. More information is available at www.ntu.org.