Amazon has avoided sales taxes since its inception

by Brian Leubitz

Amazon is a product of the 90s internet boom, you know that part of the story already.  But unlike many of their contemporaries, they saw not only the mere presence of the internet being the next step forward, but also a nice little legal loophole:  Quill v North Dakota.

Quill was a case from 1992 that essentially said that retailers who sent across state lines through the mail did not need to collect sales taxes for states that they had no physical connection to.  Jeff Bezos, CEO of Amazon, was keenly aware of this fact.  An article in the Wall Street Journal looks back at Amazon’s use of this natural advantage against brick and mortar stores:

Amazon’s Mr. Bezos has said he established the company in Washington partly because it has a tech-savvy but relatively small population, so state taxes wouldn’t affect many potential customers.

“It had to be in a small state,” he said in a 1996 interview with Fast Company magazine. He even mulled basing Amazon on a California Indian reservation because he thought it would allow his company to avoid collecting sales taxes in the state, he added. (WSJ)

Over the years, Amazon has gone to great lengths to ensure that they didn’t cross the very murky line into “nexus” with states that they were targeting for their sales tax schemes.  Along with California, this list included Texas and Illinois.  Just how far did they go? Well, how about this:

For travel to California, some former employees recall being instructed by lawyers and managers to use special business cards. Rather than distributing typical “Amazon.com” cards, they used ones from “Amazon Digital Services,” a wholly owned subsidiary that sells digital content such as books and music. Representing a subsidiary, rather than core retail operations, would help prevent state authorities from going after Amazon, the people said.

“It’s a very unscrupulous practice,” said Ms. Yee of the California tax board. She said Amazon employees visiting the state on business should present themselves clearly. If they don’t, she added, “I think it’s a conscious attempt to evade California’s tax laws.” She declined to comment on whether the practice was illegal. It couldn’t be determined to what extent Amazon currently uses the method.

But Amazon’s connections to California aren’t limited to the affiliates that they unceremoniously dumped after the budget bill passed, A9.com, an Amazon search subsidiary, is based in Palo Alto, and the company has many employees in the state.  However, they claim that as they do not sell within the state, most of the employees are engineers or engineering support, that these employees should not count as the nexus required by Quill.

Ultimately, something has to give, as American taxpayers really don’t need to subsidize Amazon.com anymore.  Sen. Durbin (D-IL) is now pushing the Main Street Fairness Act, a measure that would create a single national sales tax with one reporting mechanism for sell by mail retailers.  Interesting, Amazon has chosen to support the measure as an easing of reporting deadlines.  The bill is unlikely to pass in current governing climate in DC, and Amazon has to know that.  For a multi-billion company, the costs of reporting the taxes would be essentially negligible.  Whether they are using their support cynically to fight the taxes in the states is up for debate.  

Referendum could get expensive

by Brian Leubitz

A new poll by the LA Times and USC shows that voters are split on the “Amazon” referendum.

The poll found 46 percent of voters favor the tax and 49 percent oppose it.

Gov. Jerry Brown (D) signed the bill last month, but opponents are collecting signatures to put a measure on the ballot to overturn it.

“At this point, Californians are evenly divided on whether online purchases should be taxed. This could be one of the most expensive campaigns in California history, and neither side starts with a clear advantage,” Dan Schnur, director of the USC Dornsife/Los Angeles Times poll, said in a statement. (Hill)

With some brick and mortar retailers looking set to join the battle against Amazon, there is going to be a lot of money flowing back and forth when this one appears on the primary ballot.

From a strategy standpoint, Amazon just gets to bash legislators, always an easy target.  On the other hand, supporters of the online sales tax will have to do some explaining.  There are a lot of reasons to support the tax, but actually getting the votes? Well, the old saying goes, when you are explaining, you are losing.

One more point was that there were more “Strongly” opposed to the sales tax collection than those “Strongly in favor” of the collection.  So, Amazon has a higher ceiling and a broader audience to attempt to move.

Amazon wants to overturn rules requiring they collect sales taxes, but is it possible through referendum?

by Brian Leubitz

The following provision of the California Constitution will get much scrutiny over the next few weeks (and months) as Amazon seeks to overturn the requirement that they collect sales taxes:

SEC. 9.  (a) The referendum is the power of the electors to approve

or reject statutes or parts of statutes except urgency statutes,

statutes calling elections, and statutes providing for tax levies or

appropriations for usual current expenses of the State.

That’s from Article II of the California Constitution.  While a quick reading would indicate that Amazon could not, in fact, put the tax statute to a referendum, quick readings don’t always win the day.  And while Amazon’s attorney, Steve Merksamer, spouts off about how the right to referendum is “sacrosanct,” it isn’t quite that simple either.

The measure is now in the capable hands of Attorney General Kamala Harris, who will determine whether it can proceed to the signature gathering phase.  If she determines that it is not a valid referendum, then Amazon will likely sue.  If she finds it is valid, well, expect a suit in the opposite direction, after all these are some high stakes:

Whichever way she rules, the losing side could end up suing.

“I’m sure there will be litigation on this,” said Assembly Majority Leader Charles Calderon, D-Whittier.

Calderon, Assemblywoman Nancy Skinner and several area retailers crowded into Swanberg’s on J, a small midtown clothier that specializes in Hawaiian shirts, to blast Amazon’s sales tax stance. By not collecting the tax, Amazon is harming brick-and-mortar retailers, they said.

“It’s a fairly big issue,” said Swanberg’s owner Lauren Lundsten, wearing shorts and a Hawaiian shirt.(SacBee)

The automatic 9% discount that Amazon gets is made any more fair through all of their machinations.  They’ve blocked other avenues to charge sales tax on their products, so what choice is left?

We should hear sometime soon from the AG’s office, and then shortly thereafter in the courts.  But this is not a battle that should have to be fought for the sake of an unfair advantage for an out-of-state corporation.

In New York, Amazon.com is collecting taxes from sales there, but not submitting them to the state while they are suing to block the legislation that requires them to collect sales tax.  In California, there is a tried and true way that major corporations fix policy by throwing cash at it: the referendum process.

Amazon.com Inc. wants California voters to decide whether to overturn a new law that forces online retailers to collect sales taxes there.

A petition for a referendum was filed Friday with the state Attorney General’s Office so that voters can decide on the requirement, which was included in a state budget signed into law in late June. (SacBee)

This really should come as no surprise to anybody, as it only costs them a few million bucks to get it on the ballot.  And the basic question is one that they will do their best to boil down to something along the lines of “Do you like free shipping? So do we? We also like not charging tax. Yay for no taxes!”

Beating back such a referendum will be a very tough fight on some uphill terrain.  That isn’t to say that there won’t be those who will try.  Some of the biggest backers of the Amazon legislation in the first place have some pretty big pockets, like, um, Walmart, Barnes & Noble, and Best Buy.  And it is true that the legislation benefits big box stores, but it also benefits the few remaining small retailers. And while the big box stores are (very, very) far (extremely far) from perfect, at least they do provide jobs to local communities.

On what grounds is it good policy to give a sales tax exemption to a company that ships jobs out of the state?  It is a happenstance of our jurisprudence that mail-order and online companies don’t have to charge sales tax, I get that.  But from any way you look at it, it just doesn’t make policy sense.

There are a number of ways to go about defeating this Amazon referendum, depending on how much money comes into opposing it. But by the time this hits the ballot in the primary next year, expect lots of ink, pixels, and TV bandwidth to be spilled (ads and coverage).  Depending on when the election is next year, it will be a very difficult time to fight back.  Yet, I imagine there will be a pretty good fight on this.

And, for the record, no, Amazon.com, I do not want a pony.

You may have heard something about the tax situation in the budget.  There aren’t any real increases, as you know, no Republicans voted for it.  But there are a few things that do attempt to increase revenue.  Most publicly, there is the so-called “Amazon tax”, which isn’t really a tax at all.  All it does is instead of depending on Californians to keep track of their purchasers from major online retailers and then pay use tax, and puts it on said major online retailers.

You’ve been paying your use tax dutifully every year, right? Right?  Well, if that was the case, then Amazon wouldn’t be going to lengths that it has gone to avoid charging sales taxes to California residents.  Because here’s the news on that front, they’ve decided to terminate their affiliate program in California due to the new requirement to collect sales taxes:

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers – including but not limited to those referred by California-based marketing affiliates like you – even if those retailers have no physical presence in the state.

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, 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 on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.

Of course, they have no proof that job losses are arising from anything but their own obsitancy from paying their fair share.  They use government services heavily, after all, their packages go across interstate highways and city roads maintained by the government, and that whole internet thing? Yeah, that was originally a project of the government.  But they don’t give a crap about any of that.  They are about one entity and one entity alone, and that’s Amazon.com.  

They like that they get this unfair advantage on price.  Sure, big box retailers aren’t exactly notorious good actors, but at least they pay their freaking taxes.  Amazon complains that it is just too hard for them, or they can’t process it.  Frankly, that’s BS.  They manage to maintain a catalog of millions of products, I’m pretty sure they can handle the few lines of code and a few checks for sales tax.

So, with that, as a former “affiliate” of Amazon, I have now switched to Barnes & Noble, who pay their taxes.  You can find that link in the upper right corner.  Furthermore, there are these other institutions.  You can walk in to them, and actually see the products IRL.  Crazy, but true.  Please, consider supporting your local businesses first before you give the money to an unsupportive partner like Amazon.  

I’ve mentioned the so-called “Amazon tax” a couple of times recently, and now it looks like it has passed the second big hurdle by clearing the Senate.  It was actually packaged up into a bill by Sen. Hancock with two other bills:

Hancock added, “Out-of-state online merchants are able to underprice local stores and California-based online businesses by as much as 10% by simply refusing to collect state sales tax.  We’re finally on our way to changing that in a way that will help small business and brings in more revenue.  It’s only fair.”

The three bills that are part of today’s legislative package include:

* Senator Hancock’s SB 234, which insures that the state tax board (Board of Equalization) has the authority to enforce collection of state sales tax by out-of-state retailers.

* Assemblyman Calderon’s AB 158, which specifies that retailers have a business “nexus” or connection with the state if any member of their corporate family is located in the state.

* Assemblyman Skinner’s AB 153, which obligates Amazon and others that use in-state affiliates to promote their sales to collect state sales tax immediately.

The measure incorporating the three bills now goes to the State Assembly, where a vote is also expected later today.

Hancock’s bill should pass the Assembly on a majority vote basis today, and head to the Governor’s desk.

Back in January, I wrote up a little ditty about Asm. Nancy Skinner’s AB 153 bill to require sales taxes collection for major retailers who mostly exist online, but have sizable presences in California.  Of course, this is really directed at Amazon.com, the world’s biggest internet retailer.

The good news is that the bill passed the Assembly, after a modification requiring affiliate payments of over $500,000 rather than $10,000.  The change is relatively minor, irrelevant to Amazon, but actually could end up making a difference for some growing e-businesses.

You’ll not be surprised that I’m mostly interested in this for the revenue purposes.  Sure, I pay my use tax (or guess at it anyway), but to be honest, few people do this.  To get that revenue, it really has to be done at the seller’s side.

And that is where this bill comes in, requiring online retailers who use so-called “affiliates” to drive them business.  Basically, these are California folks (um, like me) who drive traffic to Amazon who then get a cut of sales.  New York has already used this legislation, and it is now pending in court.  We are breaking no new ground other than in a quantitative aspect.

But there is still the other argument, which is really more compelling to a wider swath of people that the lack of taxation on internet retailers is just a blow to small businesses in the state who do have to collect their local sales taxes.  Scott Hauge, the president of Small Business California, made this point quite well in an op-ed that originally appeared in the San Jose Merc back in March:

Unfortunately, a tax loophole being exploited in our state hurts small businesses and creates a competitive disadvantage in the marketplace. Out-of-state, online-only vendors don’t collect state sales taxes like brick-and-mortar stores are required to do. This loophole has given out-of-state, online-only retailers an unfair competitive advantage over retailers in our own community.  As a result, the brick-and-mortar small businesses that employ our family members, participate in our communities and are critical to our economy’s recovery are operating at a loss, and jobs are at risk.

At its core, this is an issue of basic fairness. California businesses are being priced out of the marketplace because they are following the law and collecting the sales tax as required by law. All the while, online-only retail giants like Amazon.com are refusing to collect the sales tax by exploiting a loophole and passing on the liability to remit the sales tax to their consumers, many of whom have no idea the compliance burden falls on them to track and issue payment.

The result has meant that online-only retailers abusing an outdated system to get around collecting the sales tax can offer an artificially lower price. That’s not fair, not right and not the way the marketplace should work. It is no way to do business in a 21st century economy.

Fortunately, our state has an opportunity to close the loophole, modernize the system and ensure small businesses are able to compete. Lawmakers can support Assembly Bill 153 by Assemblywoman Nancy Skinner that will require out-of-state, online-only retailers to comply with the same requirements to collect sales taxes that California businesses must follow. (SBCal)

In the end, I think what should ultimately happen with the internet is that there should be some sort of federal sales tax which then gets divided down to the states.  Or…you know, totally overhaul the taxation system that would allow us to rely more on progressive taxation and less on the more regressive sales taxes.  But that last hope seems rather distant at this point.

In the short-term, the Senate should quickly pass AB 153 and get it to the Governor’s desk.  Amazon has threatened to cut off their California affiliates, but as they showed in New York (but not Colorado) they are a bit more cautious on the big states.  Lets get this done, both for the revenue as well as the simple fairness of requiring the same taxation for all businesses.

( – promoted by Brian Leubitz)

by California Labor Federation Legislative Director Angie Wei

Assembly Republican leader Connie Conway has an answer to just about any question directly relating to our budget crisis. “No.” No revenues. No vote of the people. No Republican budget proposal. No closing corporate tax loopholes. No spending cuts. No, No, No, No, No.

Conway explained her caucus’ flurry on “No’s” to the LA Times recently:

The reality of it is, if we put up a ‘budget’ of our own it will get picked apart, criticized.

That may be a good answer for a politician. But it’s the last thing we need to hear from a public servant.

Poor Conway says she might get “criticized.” But isn’t that part of the job when you’re working in the public arena? You put your ideas out there, you speak your values, some may agree with you, some may not. That’s the point of public discourse.

Conway doesn’t respect the public enough to engage in that discourse. Because she knows the math doesn’t add up.

There is no way to prevent cuts to education, public safety, and programs for the vulnerable from cuts without maintaining our current revenues. Conway flat-out lies to the public when they claim that there is some magical solution to the budget crisis involving the elimination “waste, fraud and abuse” or attacking public workers pensions. No one who has looked at the budget deficit objectively agrees. If we fail to extend existing taxes, our schools and universities get cut. It’s that simple.

The truth is, benefits for poor families, health care for the working poor and home care services for the disabled and the aged have already been decimated with over $11 billion in cuts made this year alone. Further cuts not only put families on the streets, those cuts would also lead to the loss of billions of federal matching dollars. This is the classic pennywise, pound foolish scenario. Or billions of pennies given up for tons of idiot pounds.

Making the shortfall worse, Conway and her big corporation-loving allies won’t give up costly and ineffective big business tax giveaways. Enterprise Zones have been proven to create no net jobs, instead cannibalizing jobs from one area of the state to another. Costing taxpayers nearly a billion dollars, Republicans have been defending them to the cliff of fiscal failure.

Allowing companies to elect how they want to pay state taxes is another terrible plan, again defended by Conway and her caucus.

Conway isn’t willing to extend existing taxes. She won’t let the people vote. She won’t issue her own proposal. She didn’t even vote for the governor’s spending cuts.

Is this political cowardice? Childishness? Incompetence? All of the above? If all Conway and her hardline Republican colleagues want to offer to the budget crisis is the word “No,” I guess that’s their business. But we shouldn’t be paying legislators to say “No,” we should be paying them to do their job by working together to prevent devastating cuts to schools, public safety and other important services that serve the public.

We pay elected officials to make tough choices. Conway has shown she’s unwilling or unable to make the choices that will move our state forward. Here’s a “No” that Conway should have to hear from taxpayers if she continues to obstruct solutions to our state budget crisis: No paycheck for politicians who don’t do their jobs.

As April was closing, we noted the big surge in tax revenues as people got their taxes in on the last few days.  Now it seems that we are even doing better than we expected then:

State officials are reporting an unexpected $2-billion surge in tax receipts that will help lawmakers close the remaining $15-billion budget deficit, and the Capitol is humming with hope that more is coming. …

Some analysts say the surprise – the sign of a brightening economy – could be just the beginning. Revenue has crept up incrementally for months and jumped in April, when people paid their taxes. It may be time to raise projections, they say, with the potential for billions more to flow into state coffers.

“As much as a third of the deficit will probably, hopefully, disappear,” said Brad Williams, an economist and former chief revenue forecaster for the Legislature.(LA Times)

Of course, in California nothing is easy.  This increased revenue has come at a time when the Governor is attempting to find some way, any way, to extend the taxes from two years ago.  It’s a great thing, of course, but it sure does make the people who don’t want to really address the structural imbalance want to wait it out.

But in the end, we won’t close this deficit with mere hopes and prayers.  It is going to shrink, perhaps to as low as $10 billion or so, but it isn’t going to close on its own.  And the next $10 Billion of cuts won’t come easy.  That these increased revenues come with the higher tax rates should be a sign that extending them won’t kill the economy, but those facts are fairly unlikely to sway any of the Republicans.  You see, no matter what evidence of economic realities that you give them, they all point to one thing: lower taxes.  Economy is going strong? Lower the taxes! Budget deficit? Lower the taxes! California is burning? Lower the taxes!

The tax extensions aren’t what I would choose for sound policy, but they the best shot.  Now if we could just get the 2 Republican votes in the Legislature, we could get back to trying to rebuild the California Dream.

Governor Brown has been making the case for a vote on extending the sales taxes since January.  It’s not had much effect on the Republicans in the Legislature, but it does seem to making some headway with the people:

California voters agree with Gov. Jerry Brown that tax increases should help close the state budget deficit, and they want to vote on his plan for raising the revenue, according to a new Times/USC Dornsife poll. …

Sixty percent of those surveyed, including majorities of both Democrats and Republicans, said they back such an election. The alternative being pushed by most GOP lawmakers – forgoing an election and balancing the budget by cutting more from state services – was supported by just 33%.

You can view the full poll here, but there is some really interesting information.  It might drive pretty much any politically interested person crazy as much of it is wildly conflicting, but that’s kind of what you get when you ask questions that drop nuance in favor of simplicity.  Not that there is anything wrong with this poll, but asking questions that really focus on values is more of an art than a science.

The bold face numbers aren’t so bad, with only 25% of voters preferring a cuts only budget when they find out that such a budget would require cuts to K12 education.  Later on down the line you see that when asked if they support a state budget cap at the rate of inflation, a pretty strong majority supports it.  Of course, the fact that a budget that only increased at that rate would require some pretty heavy cuts due to population growth didn’t come up.  Oh…and we still have outstanding debt that has to be paid at some point.

This really does reflect the bigger problem of a system of governance with no real leader.  There isn’t anything wrong with the Governor, it is just that the system is designed to fail.  The elected leaders are subject to the whim of the initiative system, a process that favors feel-good slogans over sound policy.  For now, we have to deal with it, as Republicans are increasingly recalcitrant.  But, this is really no way to run one of the world’s largest economies.

After all, what it comes down to is that Californians want their cake, and they want to eat it too.  They want their two Santas, one to give them stuff, one to cut their taxes. While there are these competing visions (one of which, the Laffer-curve mania, has never been shown to work for anybody but the rich), we really can’t be surprised with these type of results. After all, the Republicans have been telling everybody that they can get something for nothing for years.

If we can get it on the ballot, a focused campaign can pass revenues, of that I am confident.  My certainty doesn’t extend much past that.