Gov. Jerry Brown has signed into law California’s tax on Internet sales through affiliate advertising which will immediately cut small-business website revenue 20% to 30%, experts say.

The bill, AB 28X, takes effect immediately. The state Board of Equalization says the tax will raise $200 million a year, but critics claim it will raise nothing because online retailers will end their affiliate programs rather than collect the tax.

Amazon has already emailed its termination of its affiliate advertising program with 25,000 websites. The letter says, in part:

(The bill) 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.

The new law won’t affect customers, Amazon said, but added that the immediate termination of the affiliate program also applies to endless.com, myhabit.com and smallparts.com.

(Full disclosure: I have a personal website that has been an Amazon affiliate. It made $2 last quarter. That is not 30% of my income.)

Almost all the California Amazon affiliates have fewer than 75 employees and a large percentage have no employees, according to Rebecca Madigan, executive director of the Performance Marketing Association, a Camarillo-based nationwide trade association.

“This law won’t impact Amazon that much but it is a crisis for website owners who make revenue by placing ads on their websites for thousands of online retailers,” Madigan said. “Most of them don’t have a physical presence in California.”

California Retailers Association stated: “We thank Governor Jerry Brown and the leaders in the California State Legislature who have demonstrated their leadership and commitment to California businesses by passing and signing e-fairness into law. Small and large businesses across the state have been held at a major disadvantage by the current law that out-of-state online companies like Amazon.com and Overstock.com have exploited for years. This has cost us jobs and revenues.”

The U.S. Supreme Court in 1992 ruled that states cannot tax businesses that aren’t physically within their boundaries. Such taxes would regulate interstate commerce, which is a federal government prerogative.

However, New York in 2008 passed a law to require companies with online affiliate advertising programs to collect sales tax for sales through those affiliates based in New York. Since then Rhode Island, North Carolina, Illinois, Arkansas and Connecticut passed similar laws.

Amazon is suing New York over the law, and the Performance Marketing Association is suing Illinois.

Amazon affiliate Keith Posehn, owner of zorz.com in San Diego, said he had affiliate advertising agreements with more than 70 companies and these programs were 35% of his company revenue before the California legislature passed a similar bill last year. Then-Governor Schwarzenegger vetoed that bill.

“We got 70 termination letters in one night before he vetoed it,” Posehn said. After that, he started changing his business away from affiliate advertising and has started a new mobile application company.

“I have pitched investors and several question the wisdom of staying in California,” Posehn said. “Some venture capitalists are very keen on placing startups outside California because start-up costs are less.”

However, another Amazon affiliate, Glenn Richards, an independent recording artist in Orange County (MightyFleissRadio.com), is angry with Amazon and its head Jeff Bezos.

“I think that Amazon.com’s decision to throw their affiliates, (including myself) under the bus is a national disgrace,” Richards said. “Jeff Bezos should be ashamed of his conduct. His bully boy practice and tactics of extinguishing small business in California should be (condemned). Small business has no power…and no hope to confront Internet giants like Amazon.com.”

Board of Equalization Member George Runner blasted Brown for signing the law. “Even as Governor Jerry Brown lifted his pen to sign this legislation, thousands of affiliates across California were losing their jobs. The so-called ‘Amazon tax’ is truly a lose-lose proposition for California. Not only won’t we see the promised revenues, we’ll actually lose income tax revenue as affiliates move to other states.”

Click here to read an affiliate’s take.

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