Amazon to California: Read My Lips, No Online Sales Tax

Enjoy surfing the web cheaply and easily for that must-have item while you can: The taxman cometh.

California plans to force online retailers to collect sales taxes from consumers in the state, a new rule that drew shouts of outrage from Web-shopping giants like and, also known as

The law requires these and other online retailers to collect taxes if they have in-state business operations. Both companies operate nationwide sales programs that rely on in-state companies (and even bloggers) to drive their own online business -- boosting online retail profits and leaving government coffers empty, the state argued. The law is intended to bridge that perceived tax gap.

But Amazon was quick to turn the tables. Calling the new law unconstitutional, Amazon sent an email Wednesday to California affiliates immediately severing ties with them -- and putting those businesses in the crosshairs.

"Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011," the company wrote in an email to affiliates obtained by

By ending these local affiliate programs, Amazon and Overstock should largely exempt themselves from the law -- meaning California shoppers probably won't see taxes on books and other goods from them. (Amazon operates other businesses in California, however, which may force it to comply.) But other online stores will surely be forced to collect taxes.

"Generally, if sales tax would apply when you buy physical merchandise in California, use tax applies when you make a similar purchase without tax from a business located outside the state," the California Board of Equalization's Web page reads.

The new law is the latest in a string of similar rules: laws have been passed or attempted in at least nine other states including Arkansas, Illinois and Connecticut.

Jonathan E. Johnson III, president of (also known as, told it made a similar move yesterday, terminating its relationship with hundreds of businesses.

“We think this law is unconstitutional. But rather than fight it in every state, it's just easier to terminate the affiliates and let the businesses migrate elsewhere,” Johnson told Calling the legislation "shortsighted," he noted that the biggest affiliates move to other states in response -- it’s the smaller ones that suffer.

"If you're a blogger, living in Orange County, you're not going to move. It's hardest on these people … and in these tough times, every penny counts," Johnson said.

The legislation was intended to eliminate a perceived business impediment for brick-and-mortar retailers in the state, according to California Democratic Assemblywoman Nancy Skinner, who helped develop the bill. State and local sales taxes can total 10 percent in some California cities, and big-box retailers like Wal-Mart complained that tax-free sales on Amazon were an unfair edge.

A 1992 U.S. Supreme Court ruling prohibits a state from forcing businesses to collect sales taxes unless the business has a physical presence, such as a store, in that state. When consumers order from out-of-state retailers, they're supposed to pay the tax that is due, but they rarely do and it's difficult to enforce.

States are trying to get around the Supreme Court restriction by passing laws that broaden the definition of a physical presence. Online retailers, meanwhile, are resisting being deputized as tax collectors.

California passed such a law in 2009, but then-Gov. Arnold Schwarzenegger vetoed it.

Bigger retailers like Amazon and Overstock will be able to deal with the taxes, even if the Supreme Court changes its mind, Johnson told But it could have a chilling effect on new companies and ideas. “It's the nascent businesses, too. The next, the next BlueNile. They won't make it out of the early startup phase.”

"It's a buzz kill for jobs," he said.

The Associated Press contributed to this report.