Giving the Use Tax Teeth: Leveling Amazon's Playing Field

Posted on 20 January 2011

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By Brian Leubitz

Last year, Legislative leaders looking at how we balance the budget, investigated following New York's path by requiring, and other online companies that have affiliate programs, to pay sales tax. Ultimately, that was vetoed by Schwarzenegger, but it is not dead. Yesterday, Assemblymember 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.


Brian Leubitz publishes a leading California progressive blog covering California politics. He holds a law degree from the University of Texas and a Master of Public Policy (M.P.P) from the Goldman School at The University of California, Berkeley. After practicing law in San Francisco, Brian transitioned into politics. He is a member of the Democratic State Central Committee, serves on the CDP's resolutions committee, and is on the boards of the San Francisco Young Democrats and the Alice B. Toklas LGBT Democratic Club. This article was originally published on Calitics.

This is a good move. It seeks one important source of revenue. There are several more available sources of revenue. Here is a list.
We need to build the promise of America and of California. We need to build for the future.
The most basic promise is an opportunity for a good job. That promise is a good job for all and the opportunity to have of a good career. The tax cut – budget cut mania does not promote good jobs and careers.

First, sales tax is one of the most regressive taxes around, so I'm not sure why a blog that purports to be more liberal than conservvative would want anything to do with sales tax.

There are much better taxes to promote:

(1) Taxes on gross rents are the fairest and help ameliorate the effects of Prop 13.

(2) Gross receipts taxes - with credits for any GR taxes paid by supliers - are far superior to sales taxes since they tax all tranascations, not just sales of tangible personal property - and companies like Amazon and other internet companies would have to pay them to the state.

The courts are clear. You can't tax a company or person who doesn't have "presence" in the state. Makes sense. The federal government passed a law - (PL 86-272 maybe - I'd have to look it up to be sure) that says "selling activities" alone within a state do not constitute "doing business." So the traveling salesperson - whether in a car or using the internet - can't be taxed under current federal law.

But a Gross Receipts tax is not covered by this Public Law, plus it's a far superior tax since it taxes all economic activity including rent income, interest income, sales of property AND services. It's a far, far broader tax base than the current sales tax.

The only argument Amazon and other sellers can use to avoid a state's Gross Receipts tax is that a state would be violating the company's "due process" rights if it imposed the tax. But the slightest involvement with a state - INCLUDING SALES ACTIVITY -is enough "touching" by a company that there is no violation of due process for a state to impose a Gross Receipts tax. Get it? A state that can't tax a company via a sales tax could still tax the company using a Gross Receipts tax.

We keep reading on blogs like this how we need Prop 13 reform and internet sales tax reform, when both of these are red herrings and waste good energy from much better taxation methods such as taxes on gross rents (pretty hard to escape that one since the owner would have to move the land to another state), and taxes on Gross Receipts, where the tax rate could be extremenly low and raise the same amount as the sales tax because the Gross Receipts tax base would be so much broader.

If anyone reads this who honestly cares about good tax policy, please fight to eliminate sales taxes altogether and replace it with a gross receipts tax. Future generations will thank you for your efforts.

I love how California will pursue this ridiculous tax despite the fact that the state will ultimately lose millions. They don't include in their estimates the cost and headcount (more state employees) needed to enforce the tax, nor do they count the lost revenue from Amazon firing every affiliate in the state.

Typical California. The state is bankrupt from tax-and-spend mismanagement by bumbling left-wing idiots like Nancy Skinner.