California Governor Brown promised to end smoke and mirrors budgets that were the hallmark of the Governator’s political weakness and failure to confront the state’s structural budget shortfall.
This year, the Democrat-dominated legislature passed an “Amazon tax” — an attempt to broaden sales taxes to out-of-state e-commerce sites. This tax was in the budget Brown vetoed, but is also in the final budget deal he signed Wednesday. (The Governator vetoed a similar law two years ago.)
Of course, more taxes are favored by politicians who want more money to spend. In this case, they have also been championed by local businesses [and national brick & mortar businesses like Barnes & Noble (NYSE:BKS) and Target (NYSE:TGT)] who are stuck paying the tax and don’t like giving Amazon (NASDAQ:AMZN) a 10% cost advantage.
Being temporarily out of the state, it’s been hard to find a serious discussion of the tax online. The mainstream media seems to be demonstrating willful ignorance while the anti-tax bloggers are using doom-and-gloom hyperbole.
Thus, it was refreshing to find this description in Accounting Today:
The tax would bring in an estimated $200 million a year. The bill would allow California to collect taxes from any online retailer that has nexus with an affiliate site in California. Amazon.com and Overstock.com have been dropping their affiliates in several other states in a bid to fight against such laws.
The bill also includes two other bills that were also passed by the California State Legislature that would require online retailers that have corporate subsidiaries and distribution centers in a state to collect sales tax from customers, along with another bill that clarifies when other kinds of physical presence require a sales tax to be collected. The three bills were combined into one and sent to Brown's desk earlier this month.
There are three problems with the bill.
First, from a technical standpoint, there are questions are whether this is a tax increase that requires a 2/3 vote. Either it is or it isn’t, but this may take a lawsuit (and appeals up to the SCOTUS) to resolve.
The biggest issue is that the belief that Amazon will pay sales tax contains an (un)healthy degree of self-delusion. First, the Supreme Court has held that sales taxes can only be assessed if there is a physical presence in the state, and Amazon has responded to previous such efforts (like in NY) by eliminating any physical presence.
Thus, this story from Thursday’s LA Times predicting swift payment of taxes is either pure propaganda or willful ignorance:
Online retailers must start collecting sales taxes from California customers
Beginning Friday, Amazon.com Inc. and other large out-of-state retailers will be required to collect sales taxes on purchases that their California customers make on the Internet.
The new tax collection requirement — part of budget-related legislation that was signed into law by Gov. Jerry Brown Wednesday — is expected to raise an estimated $317 million a year in new state and local government revenue.
Brown's signature on the budget bills is aimed at closing a loophole that freed online retailers, such as Seattle-based Amazon, from collecting sales taxes and sending them to the state when they had no brick-and-mortar stores, warehouses or offices in California.
Not collecting sales taxes gave Internet retailers a competitive price advantage over California's small businesses such as independent booksellers and big-box retailers with a presence in the state, including Barnes & Noble Inc., Wal-Mart Stores Inc., Best Buy Co. and Target Corp.
"You can't give one segment of retail a 10% discount every day. It's just not fair," said Bill Dombrowski, president of the California Retailers Assn., a major player in a coalition of large and small stores supporting the legislation.
California's new requirement will generate badly needed state revenue and send a signal to Congress that "we want to see a national solution" to the issue of taxing Internet sales, Dombrowski said.
The LAT assumes that Amazon subsidiaries in California make it vulnerable to the tax, but those subsidiaries can be moved or sold. Who thinks Amazon is going to keep IMDB if it forces a 10% price increase for 12% of its US customers?
The other nexus of presence is the affiliates program. In fact, I was alerted to this issue by an e-mail Wednesday from Amazon, that — as predicted — announced their intention to cancel the Amazon Affiliates program for all California residents:
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. …
You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here.
No subtlety on that last point, eh? For me it doesn’t matter much, because my revenues from Amazon links are negligible — much less than the rebate from my Amazon credit card.
And this brings up the final point: as the anti-tax advocates note, terminating these affiliate programs terminates revenues for small businesses that depend on them. Their choice is either to give up the revenue permanently or move to a state (like Nevada) without sales taxes.
To its credit, the LA Times mentions the problem (without suggesting that Amazon’s gambit may prevent it from ever paying the tax):
Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out.
That's what Ken Rockwell of San Diego, the owner of a 12-year-old photography website, said he planned to do.
"Will it be Las Vegas or Scottsdale or Ensenada?" he said. "It's a question of where, not if."
Personally, I’d pick Flagstaff — a beautiful small town with a relatively mild climate for Arizona — but only if one believes that Arizona politicians won’t go ahead and do the same thing.
The anti-tax site BigGovernment.com, notes that the new law may also tax eBay (NASDAQ:EBAY), specifically its online merchants. Since eBay is a San Jose-based company, it can’t (easily) eliminate its presence. Attempts by Bay Area politicians to carve a loophole to help eBay may not be enough — instead, non-California eBay merchants who don’t want to pay sales tax may jump to Amazon.
In the end, the politicians will claim they’ve raised taxes in the name of “fairness,” while (as in NY’s attempts to tax Amazon) failing to collect taxes from Amazon while this spends several years winding its way through the courts.
Perhaps this is the true intention of the legislature in passing the law: millions of dollars in billable hours for their trial lawyer friends as Amazon, Overstock and other out of state retailers sue the state seeking to get it invalidated.