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Schwarzenegger Gets Into Affiliate Tax Battle

July 2nd, 2009

Governor Arnold Schwarzenegger has stepped into an Internet tax battle which has been brewing between online retailers Amazon.com, Overstock.com, and a number of states which have been mulling Internet taxes. The states have been working on legislation, targeted at Internet retailers which have affiliate advertisers in their state, to make them subject to local taxes. According to the Office of the Governor, Schwarzenegger said he promised to veto a tax on affiliate advertising, after Overstock.com said it would pull affiliates based in California, North Carolina, Rhode Island, and Hawaii due to efforts by those states to tax transactions of the firm.

Schwarzenegger said in a statement that his administration contacted Overstock.com when they learned of the news, saying it makes "no sense to go back to the taxpayers to solve the current shortfall." Amazon.com is reportedly dropping its affiliate programs in North Carolina and Rhode Island, and was looking at dropping affiliate in California due to tax efforts in those states; Overstock.com followed Amazon.com and dropped its affiliates in California, North Carolina, Hawaii, and Rhode Island yesterday over efforts to tax Internet businesses.

All of those states have been looking to legislate that Internet companies who use "affiliate advertisers" based in their states, saying that those retailers can considered to have a physical presence in the state due to their affiliates--and hence can be taxed like local businesses. Currently, Internet retailers without a physical presence in those states do not have to collect taxes from customers in those states, which has long been a sore point with local retailers, states, and municipalities. Budget shortfalls due to the economy have pushed the tax issue to a boiling point, as states have looked for new ways to bolster their coffers.

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