By enacting Assembly Bill 28X into law earlier this week, California has joined the growing ranks of states that require large out-of-state retailers to collect taxes on purchases that their California customers make over the Internet.
This new law, effective immediately in California, is commonly referred to as an “Amazon Law” because of its impact on the large Internet retailer Amazon.com. Amazon immediately filed suit to prevent a similar law from taking effect in New York in 2008 (that litigation is still pending as earlier decisions are now on appeal.)
California can require retailers to charge and collect tax on sales only if the retailer has a connection to California based on some physical presence in the state (“nexus”). Under California's prior law, the tests for having nexus with the state were cast in more traditional “brick-and-mortar” terms of physical presence, so that a retailer had a presence in, and therefore a connection with, the state if the retailer had workers, warehouses, or offices located there.
California's new “Amazon Law,” broadens the test for finding nexus by expanding the definition of a “retailer engaged in business” in the state. Internet retailers that have (1) affiliate advertising agreements with California-based websites, and (2) revenue related to those affiliates that exceeds threshold amounts, are now deemed to be engaged in business in California and are subject to the state's sales tax reporting requirements.
More specifically, under the new law, an Internet retailer that enters into affiliate advertising agreements under which persons in California, for a commission or other consideration, directly or indirectly refer potential purchasers (whether by an Internet-based link, an Internet website, or otherwise) to the retailer are now classified as a “retailer engaged in business” in the state provided that (1) the total cumulative sales price from all sales by the retailer to California purchasers that are referred pursuant to these agreements is in excess of $10,000 within the preceding 12 months, and (2) that the retailer has cumulative sales of tangible personal property to purchasers in the state of over $500,000 within the preceding 12 months, except as otherwise specified.