The Honorable Arnold Schwarzenegger
Governor, State of California
State Capitol
Sacramento, CA 95814

25 June 2009

Dear Governor Schwarzenegger:

We are writing on behalf of the ABA member independent bookstores operating in more than 250 locations in California to urge you to leave in place the budget provision that provides for Internet sales tax collection. This provision would clarify state laws to require non-California merchants with an affiliate network in the state to collect sales tax on purchases shipped into California. This is a matter of great importance to our members, who employ approximately 2,650 people, with an estimated payroll approaching $42 million.

Importantly, leaving the Internet Sales Tax provision in the budget would not establish any new "Internet taxes." Rather, it would simply ensure that existing tax law is enforced equitably by requiring out-of-state merchants with nexus in the state to collect and remit sales tax on purchases made by state residents. This is an issue of tax collection, and is in no way a tax increase. Leaving the provision in place would play a significant role in leveling the playing field for California businesses and help secure needed revenue to support essential local services. The state BOE estimates that the provision would result in $200 million a year in added state revenue.

Every year, California is losing tens of millions of dollars in sales tax revenue to online retailers, many of which have nexus in the states due to affiliate relationships. According to a recent University of Tennessee study, State and Local Government Sales Tax Revenue Losses From Electronic Commerce, in 2008, the total state and local sales and use tax revenue loss resulting from failure to collect taxes on e-commerce sales in California was $1.3 billion in 2008. As online shopping continues its robust growth, this figure is expected to balloon to $1.9 billion in 2012.

Furthermore, this study stressed that the failure to collect taxes that are due has put local retailers at a competitive disadvantage to e-commerce competitors as "consumers browse on Main Street but then make their purchases online to evade the tax."

Federal law clearly defines nexus as a retail store, warehouse, office, or sales agent. We believe it is indisputable that any out-of-state online retailer that has one or more affiliates based in California -- affiliates that clearly act as solicitors on behalf of the online retailer and earn commissions based on sales -- has nexus in California. These out-of-state online retailers should therefore be collecting sales tax. California booksellers that have e-commerce operations collect and remit sales tax, and so should non-California merchants that have nexus in the state. When the state allows these online retailers to continue their sales tax avoidance practices, California's citizens are the primary losers, as potential tax revenue is uncollected -- monies that fund such essential services as schools and first-responders.

We understand that some affiliate marketers are making the argument that fairly enforcing state tax law will hurt the state's economy by putting them out of business. They fear that the large, out-of-state online retailers that pay them a commission to sell their goods might possibly drop them from their affiliate programs. Obviously, we cannot speak to affiliate marketers' worries. However, in New York State -- which clarified its state law in 2008 -- not only has the New York State Supreme Court thrown out Amazon.com's challenge of the law, Amazon.com also has maintained its network of New York-based affiliates. Additionally, while one out-of-state retailer did drop affiliates, more than 30 online companies registered to collect and remit sales tax. According to the New York State Department of Taxation and Finance, in the first six months since their Internet Sales tax provision became law, the state has recouped $46 million, and New York State expects to recoup $68 million in FY 2009 - 2010. The Internet Sales Tax provision allows New York retailers to compete on an even playing field, and that, in turn, is good for the state's long-term fiscal health.

The time for California to act is now. The results of sales tax inequity can be seen in the many empty storefronts on Main Streets throughout California. Sometimes, however, it doesn't result in a store closure, but in lost sales tax through decreased sales and lost income tax through job cuts. A downturn on Main Street creates a ripple effect that is felt throughout California's economy. When out-of-state retailers with affiliates in California shirk their responsibility to collect and remit sales tax, it doesn't just affect retailers, it hurts the state's entire economy, as well as undermines essential support for critical local services.

The bottom line is, we are simply asking for a level playing field while out-of-state, online giants wish to maintain an unfair competitive advantage. At present, by not enforcing sales tax laws, California is providing out-of-state retailers with a 6 percent advantage right out of the gate.