The law, as understood in the thread, would potentially tax any seller who using AdWords to market their product or service. Moderator, incrediBILL, explained:
The conclusion I drew after reading the law is that since AdSense directly refers customers via links, as do the AdWords ads showing in the SERPs, it's therefore theoretically possible that anyone using Google as an advertising vehicle could be subject to CA tax.
If people advertising in Google are suddenly subject to collecting and paying CA tax then people will most likely stop advertising on Google.
You can see the details about this tax proposal named AB178 and the hearing won't be until April 13, 2009.
Some are very skeptical over the bill and they are not worried too much about how it might impact them.
Update: 5 Star Affiliate Blog has very good coverage of this concern. Well worth a read.