California Passes Internet Tax Law – Huge Impact on Cashback Sites

July 2, 2011 · 0 comments

“Pay up,” says California.  On Wednesday, California governor Jerry Brown signed into law a bill requiring sales tax to be collected by all online businesses on customers customers directed to them from a website in California.  Anyone in California with a website that contains banner ads or links that activate a sales commission are considered within the “nexus” of the transaction, even though the webmaster (aka, the “affiliate”) never touches the product at all himself and doesn’t even know the buyer.

Online stores that don’t charge sales tax to all shoppers, like Amazon and Overstock, are faced with three choices:  a) charge sales tax to everybody in every state (which levels the playing ground, making them concede one of their selling points over their competition), b) set up a system to ONLY charge sales tax to California shoppers and ONLY when they shop through California webmasters’ banners, or c) dump the California webmasters.

They’re opting for c).

This affects every webmaster in California — from the mommy bloggers to the big dogs, which include, of particular interest to us, cashback programs headquartered in CA like Extrabux, MyPoints, and the grand-daddy of them all, Ebates.

Ebates’ Chief Marketing Officer Rob Smahl told the Performance Marketing Association in May that the company was experiencing record revenue and record growth.  However, he warned that should this law come to pass, the company would have to put planned hiring on hold because of the law’s potential impact on their business.

“We know that every out-of-state merchant we work with will pull out of California immediately if this passes,” Smahl said.  About 25% of Ebates’ over 1,200 merchants are out of state.

Amazon (which doesn’t permit cash back) and Overstock (which does) immediately dropped all California merchants…including Extrabux, MyPoints, and Ebates.  According to posters on ABestWeb (the leading affiliate industry forum), other major merchants have followed suit in the past few days including Fingerhut, Cabela’s, Zappos, GiftBaskets.com, 6pm, ThinkGeek, Checks Unlimited, PC Connection, ShopBop, B&H Photo, CSN Stores, Fabric.com, Gardener’s Supply, Endless.com, Wine Enthusiast, and Backcountry.

How does a company react to something like this? Smahl told the PMA, “If the money disappears we have to consider moving.  All options go on the table…We cannot let this destroy our business.  We would have a hiring freeze, next thing would be layoffs, and then possibly moving out of state.“  When Illinois passed a similar law this spring, FatWallet simply packed up and moved five miles down the road to Wisconsin.  Unfortunately, there is no “just down the road” option for a company located in San Francisco.  Relocation would be expensive and would no doubt result in a loss of some key personnel unwilling to make the move.

And what about the red-headed stepchild of the United Online family, MyPoints?  United has been talking about wanting to sell them for a while — they were “too undervalued” to be able to pull off an IPO a couple of  years ago and it was pulled at the last minute — so now what?  Overstock must have been one of MyPoints’ leading merchants because they had (unusually) competitive rates for them.  Now, they’ve disappeared from the site — though a couple of the other merchants listed above haven’t yet been pulled.

And that is one possibility for some of these merchants:  that they will be allowed to remain on California websites but with restrictions.  After a similar law was passed in New York, some NY merchants have allowed NY affiliates to rejoin their programs if they sign a special contract agreeing that they will not email, blog, display banner ads, or otherwise reach out to members that could live in NY.  In other words, the merchant could be listed on the cashback program’s site but could not be mentioned in any other way.

These are interesting times, my friends.  At some point (looking into my crystal ball quite a while here), all online stores will charge sales tax to all US residents.  But until then, these hit and miss state laws are going to cause a commotion and will disrupt our ability to earn cashback at some of our favorite programs. Let’s just hope that we don’t lose these cashback sites altogether in the process.

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