Fulfilling a horrible annual tradition, yesterday California Assemblywoman Nancy Skinner (D) re-introduced her "affiliate nexus" style Internet tax. If enacted, the measure will not only eliminate thousands of California advertising jobs, but will reduce the state's revenue stream by over $100 million. For a full explanation, Stop eTaxes's Patrick Gleason and Kelly William Cobb had a piece in today's FlashReport. Below is an except, but check out the full story here.
Assemblywoman Skinner claims that an online sales tax will generate an additional $300 million annually for the state. While that projection is without basis, even if we assume Rep. Skinner is correct, her Internet tax would chip a meager 1.1% off the state’s overspending-generated deficit. Yet the truth is that the state wouldn’t even realize that paltry sum.
Rep. Skinner’s proposal would raise no additional revenue for California. In fact, the proposal would do more to hurt small businesses and cause the state to actually lose revenue. Current law, under the U.S. Supreme Court’s ruling in Quill v. North Dakota, requires that a business have a physical nexus in a state in order for the state to compel that business to collect and remit sales taxes. To circumvent the Commerce Clause of the U.S. Constitution, Rep. Skinner’s bill would presume out-of-state online retailers had nexus in California if they advertise through a third party “affiliate” in the state. To avoid collecting what is clearly an unconstitutional tax, online retailers have and will simply terminate contracts with advertisers.
Of the states that have enacted this online “affiliate” tax in the past few years – Rhode Island and North Carolina – both have generated zero additional revenue from it. Rhode Island General Treasurer Frank T. Caprio had this to say about his state’s Internet tax:
“The affiliate tax has hurt Rhode Island businesses and stifled their growth, as they’ve been shut out of some of the world’s largest marketplaces, and should be repealed immediately.”
In 2009, 25,000 individuals and small businesses in California earned $1.6 billion from online advertising, paying $124 million in state income tax. This is a revenue stream that will dry up if Skinner’s legislation passes and it and it doesn’t even account for lost revenue from payroll, business, property, sales, and other taxes. This means the real revenue impact of Skinner’s proposal is deep in the red.
CLICK HERE for the full scope from California's FlashReport.