When it comes to Internet entrepreneurship, California is the place to be for aspiring Mark Zuckerbergs. Silicon Valley is known around the world as the technology mecca. The explosion of new technology in the last two decades has helped drive California’s economy and made it the center of the Internet-based business world. But California’s reputation as the home of innovative Internet technology is about to end—all because of the state government’s greed.
As part of a state budget deal passed late last month, Governor Jerry Brown signed a law mandating Internet-based companies collect a sales tax on all purchases from California residents. Proponents believe the mandate will bring in $200 million in revenue the government is missing as Internet-based companies refuse to collect such taxes.
A couple hundred million dollars is but a proverbial drop in the bucket considering the Golden State’s chronic billion-dollar budget shortfalls. And the long-term ramifications for this new policy of taxing Internet companies will only strengthen the argument that California is hostile towards businesses of all shapes and sizes.
For years, Internet companies outside of California have skirted the state’s sales tax by claiming that with no physical presence or “nexus” in the state, they were not required to collect a sales tax on purchases made by California residents. With no sales tax on purchases, Internet companies were given a competitive edge over brick-and-mortar businesses—something that undoubtedly fueled the massive growth of the online marketplace.
But lawmakers and the court system finally found a way to nail retailers like Amazon by considering affiliates, product developers or even marketers the physical presence nexus triggering collection of sales taxes. Affiliates are individuals within each state who earn a commission on sales they refer to larger sites such as Amazon.
New York was the first state to pass the so-called “Amazon Tax”—dubbed thus because its largest target is the international Internet retailer—and California quickly followed suit with Assembly Bill X1 28. Even as Governor Brown affixed his signature to the bill in June 29th, Amazon announced it was terminating business relations with over 10,000 affiliates within California. A state already grappling with nearly 12% unemployment lost thousands more jobs.