California institutes internet sales tax causing Amazon and Overstock to cut ties

Posted on July 1, 2011

Image representing Amazon as depicted in Crunc...

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In an effort to bring in more revenue and fortify the deeply troubled California state coffers, Governor Jerry Brown signed a law effectively immediately requiring internet companies to collect a sales tax from residents of the state making online purchases.   The result?  Instead of compliance, one of the largest, if not the largest, internet business has said “no thanks” and is pulling out: has terminated its relationship with approximately 10,000 Internet business partners in California after Gov. Jerry Brown signed a law that requires out-of-state electronic retailers to collect sales tax on purchases from Golden State customers.

The termination took effect Wednesday evening, hours after Brown took action on a bill that will produce an estimated $317 million a year in new state and local government tax revenues.

Amazon said it canceled the contracts because it does not intend to comply with the new law.

“This legislation is counterproductive and will not cause our retail business to collect sales tax for the state,” said Paul Misener, Amazon’s vice president of global public policy.

Amazon is not the only company making its way to the door due to the new California law:

Meanwhile, another big Internet retailer, Salt Lake City-based, said Wednesday that it is ending “the services of its California-based Internet advertising affiliates.”

Overstock would not release the exact number of those affiliates but said that the total is in “the hundreds.”

Overstock predicted that the cancellation would not affect its business and revenues.

“That effect may be small, as we have observed in these instances that the ad business terminated goes to advertisers in other states and the ad traffic to our site continues,” the company said in a statement. “It is unfortunate that the bill targeted California business, but we believe the law is unconstitutional and necessitated this decision. There will be no other changes to the way we do business.”

There’s an old saying about not being able to tax your way into prosperity.  Unfortunately, California has chosen to learn this lesson the hard way.   Imposing a new sales tax is not going to raise the additional revenue the state is seeking, but it will result in less consumer choice.

Posted in: California, Economy, Taxes