California lawmakers are eager to harpoon the great white whale that is Amazon.com to force it to collect sales tax on every HDTV and Kindle it sells here. But those efforts could ensnare scores of smaller fish: mom-and-pop Internet businesses that rely on Amazon and other e-tailers for their livelihood.

The e-commerce behemoth has avoided paying sales tax in California because it has no offices, stores or warehouses in the state.

But California contends that Amazon does have a presence here.

This week, the state Legislature is considering a bill that says California Web sites known as affiliates that send customers to Amazon and other e-commerce companies in exchange for a commission constitute a sales force, giving Amazon and others a physical presence, or "nexus," here. Under a 1992 Supreme Court decision, only retailers with a nexus in a state can be compelled to collect sales tax from its residents.

Cash-strapped California says it could garner $150 million a year from the so-called Amazon bill if out-of-state retailers collected tax on every laptop, Cuisinart and best-seller they peddle to folks here. Consumers are supposed to pay that tax themselves, but it's a rare shopper who does.

Scores of mom-and-pop California Web sites that drive traffic to e-tailers say they would be unfairly ensnared by the state's attempts to force Amazon to pay up. Meanwhile, brick-and-mortar retailers say Amazon's use of the Internet as a sales-tax haven is unfair to them.

Amazon (which did not return calls), Overstock and other large out-of-state e-tailers say they will cut off their California affiliates to duck the sales-tax obligation. The affiliates say that means they'll lose their income and the state still won't get the sales tax revenue.

California has more than 25,000 affiliates, ranging from part-time Web-masters earning a few bucks to large enterprises pulling in millions, said the Performance Marketing Association, their trade group. In 2008 they had revenues of $202.7 million and paid $18.9 million in state income tax, the group said. Industry reports say e-tailers generate about 10 percent of their sales through online affiliates.

How it works

Nick Loper runs comparison shopping site ShoesRUs.net out of his Livermore townhouse. When a customer visits ShoesRUs, clicks on an e-tailer's link and places an order, Loper earns a referral fee of about 10 percent to 15 percent of that sale. Last year the site generated $3.5 million in shoe sales for its two dozen e-tail clients, and $400,000 in revenue for itself, netting about $150,000 (including his salary), he said.

"If the bill were to pass and some of my major advertisers dropped their California partners, it would be devastating for me," Loper said. About 95 percent of ShoesRUs clients are out-of-state Internet companies that now have no California sales-tax liability. "It's kind of scary," he said. "I would consider moving or setting up an entity in Oregon or Nevada to be able to continue my livelihood. Obviously I'd prefer not to have to go down that path."

Loper considers himself an advertiser - "there are no shoeboxes in my garage," he said - but supporters of the Amazon bill say Loper and his ilk really work as sales reps for e-tailers.

"Affiliates are effectively a sales force - they are promoting products and getting a commission on sales in California," said Lenny Goldberg, executive director of the California Tax Reform Association, which is lobbying for the bill on behalf of independent booksellers. Affiliates such as PTA chapters and church groups often market directly to friends and neighbors, meaning they are pitching directly to Californians, he said.

Unfair advantage

Bill Dombrowski, CEO of the California Retailers Association, said e-tailers' use of the Internet to avoid sales taxes gives them an unfair advantage. "It distorts the results; we lose sales and we lose jobs," he said.

His members include large "brick-and-click" players like Wal-Mart, Target and Best Buy, which have physical stores as well as online sites and therefore collect sales tax on online purchases.

He thinks Amazon's threat to cut off California affiliates is a bluff because the state is too big and important of a market.

While Amazon dumped affiliates in Rhode Island and North Carolina when those states implemented similar bills, it maintained its affiliates in New York while fighting that state's tax-collection laws in court.

"How much business is Amazon doing in Rhode Island?" Dombrowski said. "That's why it happened there and not in New York, and that's why it isn't going to happen in California."

California's legislation is still up in the air. It passed the Senate last week and should reach the Assembly floor this week. Gov. Arnold Schwarzenegger vetoed a similar bill last year and hasn't yet said how he would handle this one.

Haphazard taxing

Players on both sides of the California bill said any Internet sales tax should be implemented uniformly, not state by state, and many want an exemption for small companies.

"If there's a fair way to collect sales tax from everybody, I have no problem with that," said Rob Smahl, chief marketing officer at San Francisco's eBates.com, a cash-back shopping loyalty site. The 40-person company compiles deals from 1,100 e-tailers, collects a commission when it generates a sale, then splits that commission with the customer.

"This bill would force us to put the brakes on a growing business," Smahl said. "It doesn't solve the real issue: If you want to collect sales tax, find a way to do it without picking on a small channel. Someone not in California will have an unfair advantage over me to do the same business model I have."