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Yesterday, California became the latest state to pass an affiliate tax law.
With a single stroke of a pen, California's governor signed AB 28 1x and may have struck the biggest blow ever to the affiliate business model in the United States.
That's because California isn't just home to a large number of affiliates, it is also widely considered to be the center of the technology universe.
The impact started to be felt in California even before the law was signed. Hours before, Amazon alerted its California affiliates that their relationship with the online retailer was about to be terminated unless the law was vetoed.
Its email stated, in part:
We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue.
This isn't the first time, of course, Amazon has sent such an email. The company has cut ties with affiliates in other large states, including New York and Illinois, over laws similar in nature to California's.
But Amazon's termination of California affiliates represents perhaps the most symbolic event yet in the fight against tax laws it believes are unconstitutional.
From San Francisco and Silicon Valley all the way down to Los Angeles and San Diego, the state is home to some of technology's biggest stalwarts and most prominent upstarts.
Every year, literally thousands of new technology businesses are launched in California. They range from basement startups run by single entrepreneurs to startups with tens of millions of dollars in VC funding.
Thanks to California's new law, however, all of those businesses will have more limited opportunities to develop affiliate-based business models.
After all, Amazon's Associates program is one of the most popular affiliate programs out there, and you can be sure that Amazon is just the first in a long line of other affiliate program operators that will be leaving their California affiliates behind in the days to come.
Sadly, just about everyone is a loser here. California, which anticipates that it will raise $200m in additional tax revenue annually from the new law, will learn the hard way, just as other states have, that affiliate taxes simply don't work.
Affiliate program operators terminate their affiliates, as Amazon has already done, and larger businesses that can't afford to lose their affiliate program revenue relocate to other states.
This, of course, actually has a negative impact on tax revenue, as the relocating companies take with them their corporate income tax payments, as well as the personal income and sales taxes that employees pay.
There may, however, be a silver lining in all of this. Given the number of technology companies in California and the sway the technology industry has in the state, one has to believe that there will be some sort of backlash against the new law.
Once the state realizes that it isn't raising any new revenue from the law, and is forced to face the ugly fact that its ever-important technology industry is locked out from participating in major affiliate programs, it may just come to its senses and reverse course.
If it doesn't, and affiliate tax laws aren't found to be unconstitutional, this business model may soon be effectively dead in the United States.