The new law, known as the "Amazon Tax," starts July 1. It's supposed to add $200 million a year to state coffers. But critics say the price is a loss of jobs.
Most retailers with a storefront in California, like The Avid Reader bookstore, are happy Governor Jerry Brown signed the bill that forces out-of-state Internet sites to start collecting sales tax from residents.
They've always felt it was unfair that customers could essentially get a discount for buying items tax-free online, while stores have to charge a sales tax.
"Why should the brick and mortar person operate at a disadvantage when they're the ones who does the local hiring, pays the local property taxes that support the police and fire and other social services, and Amazon doesn't," said Stan Forbes, co-owner of the bookstore.
The law previously only required retailers with a physical presence in California to collect a sales tax. "E-tailers" like Overstock.com and Amazon.com got away with not collecting money because they don't have a storefront in this state.
But those e-tailers contract out with 25,000 small businesses based in California, known as affiliates, that provide links to sites like Amazon and Overstock.
Now that the new law is forcing sites to start collecting the sales tax from California residents buying from California affiliates, e-tailers have begun severing ties.
Amazon just told affiliates Wednesday: "We will terminate contracts with all California residents that are participants in the Amazon Associates Program."
San Francisco-based Ebates.com got a similar letter from Overstock. Being cut off could mean a loss of 20 percent of business and put some of its 50 workers' employment in jeopardy. Now corporate officers are weighing their options.
"So everything from layoffs, at least a freeze of hiring, and we're a business that's been growing and been hiring people over the last few years -- all the way up unto leaving the state," said Ebates.com Chief Marketing Officer Rob Smahl.
State Assemblywoman Nancy Skinner (D-Berkeley) has been trying for years to push the so-called "Amazon Tax" through.
"If Amazon decides to be the bully that they've threatened to be, we've got lots of great retailers: Sears, Barnes and Noble, Target, Home Depot -- all that have affiliates programs," said Skinner.
Amazon also cut ties with affiliates in Arkansas, Connecticut and Illinois when those states passed similar laws. Washington-based Amazon did not cut ties with New York, another state with a similar law.