Savings.com sends Dear John letter to California

Two months ago, Governor Jerry Brown signed the Affiliate-Nexus Tax bill, which requires Internet retailers with a relationship to California-based businesses to pay sales tax on all related transactions.  The state government figured that Amazon and other retailers needed the California market too much to bail out of it.  Instead, those retailers have cut off their affiliate relationships, which puts thousands of small businesses in California at risk of failure.  One of those small businesses, Savings.com, sent a letter to its California customers saying that they will pack up and leave — and take their 100 or so jobs with them:

Ever since you and your new BFF–the Affiliate Nexus Tax–started hanging out, people just don’t want to do as much business with us anymore. Sure, we know it seems only fair that online retailers without a physical presence in California should have to collect sales taxes from their customers just like everyone else. The problem is, until every other state–or the federal government–feels the same way, companies like Amazon.com, Overstock and others have decided that it’s not worth working with us (or 25,000 other California-based businesses) anymore. Apparently, in your eyes, our affiliate relationship makes them liable for collecting taxes. They’ve decided it makes better sense to just work with affiliates beyond your, admittedly still picturesque, borders.

We know this letter might come as a bit of a shock–especially because things had been going so well between us. Last year alone we helped drive $400 million in sales and we’ve doubled the number of California jobs we provide year-after-year. And people started to notice: the LA Business Journal named us a “Best Place to Work in Los Angeles” and then Inc. Magazine just named us one of the “500 Fastest Growing Companies in 2011.” So what went wrong?

Well, you’re a Pisces, we’re a Gemini. And maybe we’re just being sensitive–like the time we asked you what color our eyes were and you said “white”–but we can either stick with you and try to weather the loss in revenue during these already fragile times, or we can start considering some of the offers from the other states that changed their feelings about affiliate companies like us. Sure, we’d miss you (you are still gorgeous after all) but maybe some clean Rocky Mountain air, or the sound of crashing surf on The North Shore, would be refreshing. Don’t worry, you could keep the futon, VCR player and Charoodles–but our 100+ employees and the state income taxes they pay each year would be coming along with us.

Well, who needs those 100+ jobs anyway?  Er, California does, since it has one of the highest state-unemployment rates in the nation at over 12%.  Obviously the state of California is more focused on collecting new taxes than in promoting small business, and just as obviously, the small businesses that work with Internet retailers can relocate more easily than most others.

It’s not as if the e-merchants didn’t warn California of the impact from the ANT.  Two months ago, Savings.com COO Thomas Swalla told SoCalTech that California’s hubris would be its undoing:

How did the tax move last night affect your business?

Thomas Swalla: Certainly, a majority of our business model is directly affected by this. I think there are two things going on. One, is the issue of whether Amazon should have to collect sales tax for California. I have my own personal opinions, but from a company stand point, that’s neither here nor there. However, the reality, is that the law, as it is written, tries to force Amazon and others to pay taxes here. The law says–because you have a relationship with Savings.com, that gives us right to claim nexus over you. It’s not just online business, it’s also brick and mortar retailers like Cabela’s, which just told us they’re terminating our affiliate relationship too. That nexus says that you have to collect sales tax from California residents when they sell items to them. That was the purpose of the law.

So what actually happened?

Thomas Swalla: Unfortunately, the way it got implemented in California, is that those retailers said–you’re in California, we understand you passed this law, which says you have a nexus in California because of the relationship with Savings.com, so we’re just going to end all ties with all of our affiliates in the state. We’ve already gotten several termination letters from those companies, which impacts our business pretty dramatically. In other states, Connecticut and Illinois, they gave 60-90 days before the actual bill went into effect. That gives you time to plan a little better. But this literally happened yesterday. We knew it would come, but which didn’t know how or which affiliate programs it would affect. We knew that Amazon.com and Overstock would cut off those programs, but we didn’t know that folks like Fabric.com and Cabela’s would. We’re still receiving notices today.

We imagine that’s quite a negative affect on the business?

Thomas Swalla: It’s certainly been negative on our business. We’ve put all options on the table. That includes laying people off, or moving–probably to Nevada–but before we do, we want to certainly make sure we understand from the legislatures of other states around California on what their position is. If we had to pick up and move everything from Santa Monica to Nevada, we’d certainly want to make sure they didn’t go make this a law too in twelve months. It is bad, and it definitely impacts the business. This is how we make the majority of our revenue–from the affiliate model. It’s a little weird though, because they’re claiming that because Savings.com gets paid when someone buys something from Amazon, the CPA model, we are a marketing affiliate and Amazon has to collect sales taxes. However, if we were just providing clicks, using the CPC model, they wouldn’t be affected. If Amazon just paid for clicks on our side, it wouldn’t have any effect, but because it’s CPA, it does.

It sounds like legislators didn’t think through these impacts?

Thomas Swalla: To me, the frustrating thing is that while talking to people in Sacramento, this was incredibly predicable. In every other state that this has happened, they didn’t collect any additional taxes, business left the state, and there was a net negative effect. It’s very predictable. I think maybe if you’re not in the business day to day, you don’t understand that. I think most lawmakers were thinking that California is too big, and they wouldn’t just end their relationship with 20,000 companies. But yeah, they just did, and it was an easy decision.

Did the lawmakers not just understand how companies would be affect?

Thomas Swalla: I think they just don’t understand the consequence. The spirit of getting Amazon to collect taxes from people in California makes complete sense. But, the way it actually got implemented had some unintended consequences. Those companies just said–we won’t pay the taxes, and we’ll end those relationships. Not only will the state not get more revenue, it may actually lose revenue, if what happened in Illnois happens here. If you saw what happened in Illinois, there were a number of companies–CouponCabin and FatWallet–who actually moved out of state after the bill passed. That might be what happens here. If technology business relocate, the industry will end up suffering. We haven’t gotten through all the numbers, although it won’t put us out of business, it will certainly affect us in a real negative way.

Affiliate entrepreneurs have launched an effort called Get Back In Business, which hopes to put a referendum on the 2012 ballot to repeal the ANT.  Don’t expect Savings.com to make a return if it passes, though.  Once burned in the California sunshine, they’re most likely to look where governments are attempting to attract rather than repel businesses.

Update 9/12/11: Mr. Swalley is the chief operating officer of Savings.com, not the CEO; the CEO is Loren Bendele.  I’ve corrected the text above.

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