Web retailers have ended their online presence and sales to about 33 million consumers, residents of the state of California.  Major online retailers like Amazon and Overstock abruptly pulled out of the California market after warning state legislators that passing a bill to tax internet sales from out of state retailers would force them to pull out.

A 1992 Quill v. North Dakota Supreme Court ruling said that states can not tax sales of an out of state business that has no physical presence in the state.  State lawmakers worked around the ruling by saying that even an affiliate, such as a business in the state that has a website and has an ad from places like Amazon constitute a presence and therefore can be taxed.  Under this definition, there are estimated to be over 10,000 affiliates in the state of California.  The move was done in a desperate effort to close the state’s huge budget deficit and makeup billions in debt., Overstock, and other large retailers are challenging the law saying it is unfair.  Michael Griffin, the general counsel of Overstock based in Utah, says “If our corporate offices caught fire, we’re not going to call the Sacramento fire department to put out the fire,” alluding to the intent and purpose of taxes is to pay for the services of the citizens of the taxable jurisdiction.

Analysts say it is a far stretch to say if you’re based in California, and an ad appeared on your website for an online retailer, that you are now considered an affiliate, and by extension, the retailer is now an in-state business which is taxable for online sales.  An “affiliate” would indicate some type of working business agreement and shared liability, which site owners say they have no liability because it is just an ad on their website.

California based businesses love the new law and say it puts them on an equal footing, that those out of state retailers essential were able to sell at a 10% discount since they did not have to pay taxes on sales that in-state retailers did.  Love it or not, does it meet the law, and court rulings?  That is the question posed by Amazon who, according to a spokesperson, says they intend to fight the law in court arguing it is based upon questionable logic, and a far stretch of the imagination because the state is so desperate to find money to cover its huge debt.

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