Giving the Use Tax Teeth: Leveling Amazon’s playing field

Last year, Legislative leaders looking at how we balance the budget, investigated following New York’s path by requiring Amazon.com, and other online companies that have affiliate programs, to pay sales tax. Ultimately, that was vetoed by Schwarzenegger, but it is not dead. Today, Asm. Nancy Skinner announced that she was bringing it back:

Assemblywoman Nancy Skinner is making another run at forcing major online retailers, including Amazon, to collect sales tax on California purchases.

Skinner, a Berkeley Democrat, said the bill could generate between $250 million and $500 million for the state. Proponents are hoping that a new governor and some major corporate firepower, including Amazon rival Barnes & Noble, will help the legislation succeed where it failed before. (SacBee CapAlert)

Of course, this is all pretty complicated.  Back during the catalog days, the Supreme Court, in its infinite wisdom, determined that mail order companies couldn’t be required to collect sales tax.  Without getting too far into the nitty gritty, the decision was made under the constitutional theory of the “dormant commerce clause.” Basically, if Congress hasn’t taken action on interstate commerce, the states can’t do it.

And so for a generation, people have expected to pay no sales tax for anything purchased online.  And for a generation, brick and mortar stores, who have higher labor costs (eg, they hire more local workers) and other costs, were disadvantaged in one more way.  It’s a friendly way of kicking our local stores in the shins while they are already down. (Note that the federal “Internet Tax Freedom Act” actually had nothing to do with this issue, instead only addressing taxing internet access itself.)

Now would be a good time to point out that under California law, the consumer is required to pay use tax on goods bought outside the state and where sales tax was not paid.  This is true of yachts and that new Kindle you bought for your mom last year. It’s called the use tax, and it is basically the consumer side of the sales tax. The Board of Equalization has been trying to push people to pay it, but we all know the success they have had. In theory they could try doing a bunch of audits, and would surely find something on a great majority of the returns.

But, really, how efficient is that?  Having the retailer collect the sales tax is not particularly onerous for online retailers. Technically, it’s just a few lines of code, and then sending a check to the states every so often.  But that’s not really what this is about.  Rather, it’s about the unfair advantage online stores have over brick and mortar stores, and Amazon (and others) are fighting to keep that advantage.

We would be far from the first in taking this action.  New York has already done so in the same manner, claiming the “nexus” are the affiliates in the state.  Amazon threatened to cut ties with its affiliates in the state, but ultimately the market power of the third largest state in the union won out.  

However, that wasn’t the case for Colorado.  It tried something different, entirely unrelated from affiliates.  Colorado required Amazon and other large online retailers to provide a tax document to any consumer who spent over a certain amount, reminding them how much money they had spent on their site.  Legally, Colorado was on very stable ground, they were well within their power to require that.  However, Amazon responded by firing the affiliates anyway, despite the fact that Colorado’s plan had nothing whatsoever to do with them.  It was simple petty revenge.

However, it’s hard to imagine they would want to cut off the nation’s largest market if they weren’t even willing to do it to New York.  And now, Skinner has enlisted some atypical support for a tax measure by gathering businesses with a California presence and employees, from small to large, to fight against this unfair advantage at the expense of the state budget.  Of all the tax incentives that we are giving out, why would we want to give one to companies that are taking away business from the state, and shipping jobs elsewhere.

Surely the next argument you will hear is that we have quite a few of those internet businesses here.  And of course that is true (though internet retailers generally try to locate in smaller states for precisely this reason), but this is a classic race to the bottom.  States shouldn’t be fighting to give away local jobs. It just doesn’t make sense.

18 thoughts on “Giving the Use Tax Teeth: Leveling Amazon’s playing field”

  1. Actually if they are located in CA they have to collect the tax. This change by Nancy Skinner would make Online Retailers more likely to locate in CA because consumers would already have to pay taxes on purchases

  2. I generally oppose more sales tax because the taxes are flat, and, therefore regressive. Also, it is probably in need of study whether the contraction of this tax is in proportion to the stimulus of some kind of reduction in comparative advantage of online retailers. They still race to the bottom on labor. They still have massive economies of scale.

    Probably a better idea to level that off with in state spending, or, better yet eliminating sales tax and replacing it with some progressive form of tax based on income or value.

  3. Why should a state effectively subsidize out-of-state shopping? Makes no sense. I imagine to people in two states, each buying the same item, but buying it from each others’ states in order to save on taxes. Then you have ups flying one widget in one direction and an identical one in the opposite direction. What a pointless waste.

  4. I’m not sure it can be done, even if you charged double sales tax on internet purchases.  

    I almost never visit B&M retailers, apart from grocers/farmers markets, because the experience is just awful.  First, there is the traffic getting to the location, then the multitude of cars on seas of asphalt for parking, fixed hours for doing business, etc.  It is rare to get knowledgeable sales help, and when it is there, it is usually harried.  Service and support are not common.

    Not that the Internet is a panacea, but there’s less time spent, less traffic, and it’s usually open.  If the merchant on-line doesn’t have what you want, it is a click to go to another merchant, as opposed to walking/traveling to another physical location.

    Collecting taxes isn’t going to make bricks and mortar retailers more attractive.

  5. that allows corporations with multi-state income to elect a sales factor-only apportionment method, since voters stopped Prop 24 .

  6. How about just mandating the base sales tax of 8.250% without local taxes if it is an out of state retailer. At least we will get some money. If I lived in Pico Rivera or South Gate with the 10.75% sales tax rate, I would most likely get my friends and family in Orange County to order my books and electronics from and pick it up from them.

  7. I have no problem with collecting taxes from Amazon and the like, but they have large IT departments who can implement the process without much trouble.

    But for smaller companies like mine, collecting taxes on orders from other states is a difficult, expensive process. Most, but not all, of the orders I process are for downloadable content. Whether or not that is taxable depends on the jurisdiction.

    I get an address from the buyer, but now I have to look up what tax districts that address is in. Is it taxable? At what rate? Then I can charge the tax.

    Then comes the end of the year and I have to file tax returns with any states I got orders from, and often any state I’ve ever received an order from even if I’m reporting a zero amount. Plus often filing with counties, cities, parishes, etc. And in order to pay that tax, I often have to have a resale license for the jurisdiction.

    In order to keep up with tax rate/law changes I have to pay for a service to provide current tax tables, which is rather expensive.

    It’s a lot more than a couple of lines of code. If you don’t want to drive everyone smaller than Amazon out of business there needs to be a better solution. A flat nation-wide mailorder/internet sales tax rate, or even a per-state rate, where money collected is paid to the Feds via my existing tax return, who then distribute it to the states would work for me.

    I don’t mind collecting the tax as a business, or even paying it as a consumer, but make it a practical system. I’m afraid it will be implemented by an idiot like the one that came up with the 1099 reporting requirements–someone with no knowledge of business outside the Fortune 100 (or Goldman Sachs, as the case may be).

  8. Once upon a time, to collect sales tax for each customer location was rather burdensome. Thousands of possible rates, which change at unexpected intervals.

    Today, databases and computers make this easy to do. It need not be much burden.

    The sad side effect of the law as it is is that Amazon has gone out of its way to have no presence in California. The local warehouse is in Fernley, Nevada, just outside Reno. Amazon deliberately did not create a team of programmers in California to preserve the sales tax advantage.

    The problem is well solved: Amazon has even solved it, since they run Target’s website, which must collect tax for every state.

    Perhaps there might be an exemption for companies with less than $100k in gross sales or similar. But, it is time for Amazon to remit sales tax.

  9. By states can not be done, As that’s forbidden under the Dormant Commerce Clause, The Federal Government(Congress) could, But so far has never done so and probably never will. A State can only tax items sold within Its territory, Not across a State Line. No Physical Presence within a State, No Tax. States can’t even compel people to pay out of state taxes, Only Volunteer them. Affiliates are last I looked not owned by Amazon, They could be a small Mom and Pop place or even You or I, Although I’ve thought about selling stuff that I had from time to time, I never did go through with this idea. The wiki has something Here on the Use Tax, The following below is a quote from the Wiki.

    As the amount of e-commerce sales continues to rise (34 billion dollars for just the second quarter of 2008)[3] states recognize that the key to collecting these taxes rests not only in educating the individual taxpayer but with coordinating their efforts with other states. Currently, there are 19 full member states and 3 associate member states that belong to the Streamlined Sales Tax Project[4] (SSTP). The SSTP assists states in collection of sales and use tax by registering merchants who charge out-of-state consumers the appropriate state sales tax and remit the tax to the appropriate state through a certified service provider. SSTP has also been in the forefront of an effort to push Congress to amend the laws to make collection of sales tax less burdensome. In fact, in August 2007 a bill was introduced in the House[5] that would have given the states authority to require sellers to collect sales tax on out-of-state sales; however, the bill appears to have never made it out of committee.

  10. While it’s true that such a tax would generate the “$200 to $500 million” talked about in the article.  Where is that money coming from?  The consumers of California, who, as a result will have less to spend on everything else.  This is nothing but a hidden tax.

    The argument that tax-free online purchases favor out-of-state retailers over local retailers is true, but only to a point.  The locals have immediate delivery and no shipping costs working in their favor.  Plus, most of the jobs at those “local” retailers (such as Target, Wal-Mart, and so forth) are near minimum wage.  

    But I guess the big government crowd will do anything to squeeze a few more pennies from already-struggling working families in California.  

    Let’s hope this dies a fast death.  Our state would be much better off with that $200 to $500 million in the hands of the public who earned it.  

  11.  So if you buy from New Egg who is based in California, guess what you get charged sales tax! I don’t complain but I look for places where I don’t have to pay tax.

    Again as I have said, all incomes below 50K for single filers and families less than 4 people should be exempt from paying income taxes if we have to pay sales taxes on everything.

    When people say “The Poor” don’t pay taxes is a FUCKING LIE. I pay taxes on all kind of shit, mostly sales tax so stop saying I don’t pay taxes. If I buy enough shit it adds up to somebody else’s income tax rate.

     

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