As Amazon.com and other online retailers retaliate against states that are trying to force them to collect sales tax, one of the big unanswered questions is how the issue will play out in California. California and a number of other states have looked at making Amazon and other web retailers collect sales tax by classifying them as physical retailers through their relationship with locally-based affiliates who link to Amazon websites. Amazon has yanked affiliate programs in other states to avoid having to collect sales tax, and warned California it will do the same there if tax legislation there gets approved. Now, prompted by Overstock.com’s decision to sever ties with its California affiliates, Gov. Arnold Schwarzenegger is trying to hold the line.

Here’s a statement from Schwarzenegger Wednesday:

Following Overstock.com’s announcement that it will pull its affiliate advertising from California due to the legislature’s proposal to increase taxes and the announcements of other companies such as Amazon.com threatening to follow suit, Governor Schwarzenegger today reiterated his deep commitment to not raising taxes to solve our state’s budget deficit and announced Overstock.com will reinstate California-based internet affiliate advertisers:

“After passing the largest tax increase in California history, it makes absolutely no sense to go back to the taxpayers to solve the current shortfall - that’s why yesterday I vetoed the majority vote tax increase passed by the legislature. With unemployment at an all time high, we should be doing everything we can to - keep jobs and create jobs - in California. That is why my Administration immediately contacted Overstock.com when we learned of this news and, I am pleased to announce Overstock.com has reversed its decision and will continue to do business with affiliates here in California. I will continue to fight to keep jobs and businesses in California.”

California lawmakers proposed a tax on affiliate advertising and sent legislation to the Governor, but as promised he vetoed it because we cannot solve our budget deficit by raising taxes and driving businesses out of the state.

Overstock.com estimates its internet affiliate advertisers in California create millions of dollars in revenue.

So far, Amazon’s response in California is limited to a warning letter, but the online retail giant has cut off affiliate programs in North Carolina, Rhode Island, and Hawaii (Seattle online diamond merchant Blue Nile has done the same in all three states).

Is the brinkmanship working? In some cases, yes. Hawaii Gov. Linda Lingle has indicated she will veto the tax legislation that prompted Amazon to end its affiliate program there.

Amazon, of course, will continue to sell products in all states. Some suspect Amazon won’t take much of a hit from ending its affiliate programs — but it’s apparently succeeding in raising the stakes for cash-strapped states hoping to tap online retailers for more revenue.

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and WTC awards research funds  

The Washington Technology Center has announced its latest round of Research & Technology Development Grants, providing $376,454 to five researchers. The program — which awards about $1 million in state funds each year — matches academic researchers with commercial enterprises.

The five winners are posted below with descriptions from the WTC.
 
Data Data, Inc., a property data solutions company founded in 2007, is collaborating with the School of Engineering and Computer Science at Washington State University Vancouver to evaluate the use of machine learning algorithms to improve document classification and information extraction from images of public records documents. Data Data expects that successful application of this technology will enable the company to scale its real estate market statistics services to the national level and, in the process, create 40 new technology jobs in Washington during the next five years. More here.
 
Healionics Corporation, a startup biomaterials company in Redmond, is partnered with the Department of Medicine at the University of Washington to commercialize UW technology that will reduce infection from skin-breaching devices such as catheters. More here.

Modumetal, Inc., a Seattle-based developer of nanostructured materials, is teamed with the University of Washington’s Department of Materials Science and Engineering to develop an innovative nanostructured anti-corrosion technology. More here. 
 
Paine Electronics, a manufacturer of pressure instrumentation with headquarters in East Wenatchee and a production facility in Renton, is collaborating with the University of Washington’s Department of Electrical Engineering to develop an integrated circuit for use in high-temperature sensors. Paine Electronics expects the new sensors will open up opportunities in the growing geothermal and mineral exploration markets, and create 25 jobs during the next five years. More here. 
 
Simulab Corporation, a Seattle-based developer of medical and surgical simulators, is working with the BioRobotics Laboratory at the University of Washington to commercialize UW software capable of measuring hands-on surgical skills. Simulab plans to target surgical residency programs and large hospitals for the skill-evaluating simulators, and projects the creation of 20 jobs during the next five years. More here.

 

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and A kid’s take on Microsoft Kodu: Lots of fun, despite some flaws  

[Editor's Note: Aaron Broder, 15, of Nashville, Tenn., a reporter for the Scholastic Kids Press Corps, blogs at allgeektout.com. He wrote this review of Microsoft Kodu on special assignment for TechFlash.]

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Venture capital firm invests in dog treats and tortilla shells  

You don’t often see a venture capital firm invest in dog biscuits. Or, for that matter, a company that makes tortilla shells.

But Buerk Dale Victor has found some interesting opportunities in areas that traditionally don’t end up in a venture capitalist’s portfolio. The Seattle venture firm earlier this year led a $7.5 million recapitalization of Blue Dog Bakery, a Seattle maker of all-natural, low-fat dog treats.

That followed a deal with Fresca Mexican Foods in 2007, a Boise tortilla company. What gives?  

Andy Dale, a managing partner of Buerk Dale Victor, said that that their growth equity strategy has always included small buyout oriented deals.

"One idea we like is to help good people buy successful growing businesses and take them up the growth curve," said Dale, whose firm has backed a diverse set of companies such as ReliOn, Escapia and Door to Door Storage.

In the case of Blue Dog, Dale said they have known CEO Kyle Polanski for a number of years. On the Fresca deal, the firm worked with Andy Savin — who had previously held an executive role at BDV portfolio company Performant — to lead the buyout.

Dale said they aren’t limiting their buyouts to dog biscuits and tortillas.

"We are also interested in the idea of doing growth buyouts of small tech or Internet companies and have pursued a few opportunities, but not found the right one yet," he said.

And Dale noted — especially in this tough economic time — that there’s a certain appeal to look for companies that are already generating cash.

"Growth capital for cash flow positive growing businesses is certainly a theme that is a bit easier to focus on in these times," he said.

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