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.