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Amazon.com and other online retailers must collect sales tax on purchases that their California customers make in the state as part of a new law that was signed by Gov. Jerry Brown on Wednesday. The decision has led Amazon to shut down its affiliate program in the state, a move that the company had threatened earlier this week.

“Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011,” the company wrote.

Amazon also recently cut ties with affiliates in Connecticut and Arkansas, but there’s a lot more at stake in California since it is the nation’s most populous state.

Reaction to Amazon’s decision has been mixed, with technology journalist Danny Sullivan writing in an Open Letter to Jeff Bezos that Amazon is making “pawns” out of its affiliates in the battle. He writes:

First, it’s fair to the affiliates that have helped build your business. You could collect sales tax and continue to have them support you, rather than suddenly make them all angry. Angry perhaps at the state, which is what you hope. But also angry at you. For another, isn’t it time you grew up and became a real business that can compete against the bricks-and-mortar shops you undercut? Can’t you still win against them, even if you play on a more level playing field?

Meanwhile, online news site ReveNews reports that about 10,000 of California’s estimated 25,000 affiliates are associated with Amazon.com. Britt Raybould notes that those affiliates generate $124 million in income tax annually. She writes.

So with the stroke of pen, Governor Brown puts at risk $124 million in state revenues with no guarantee that anything close to an additional $200 million will be added to the state’s coffers.

Here’s the full letter that Amazon sent to affiliates:

Hello,

Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011. Those California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned before today will be processed and paid in full in accordance with the regular payment schedule.

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect your ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. As mentioned before, we are continuing to work on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.

Regards,

The Amazon Associates Team

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