The Amazon.com compromise

The California Legislature may finally have ended its long-running battle with Amazon.com over the collection of taxes. An eleventh-hour deal in Sacramento will delay for a year a new state law requiring online retailers to collect taxes from California shoppers. In exchange for the delay, Amazon has pledged to comply with the law once it becomes effective. The deal will cost the state something in the short term, but it averts a fight at the ballot box and some unseemly maneuvering in the state capital.

At issue is whether online retailers should be required to collect the equivalent of a sales tax from California shoppers even if they don’t have physical stores in California. A 1992 U.S. Supreme Court ruling held that mail-order retailers don’t have to collect taxes from shoppers in states where they have no sales outlets. Online retailers have used that ruling to justify collecting taxes only in the states where they are headquartered or have sales offices.

The ruling didn’t relieve state residents of the obligation to pay taxes on mail-order and online purchases, which they’re supposed to remit with their annual income tax returns. But few Californians do. Brick-and-mortar retailers have long complained that this practice gives their online competitors an unfair advantage, resulting in job losses and lower revenue for state and local governments.

Cash-strapped state governments have grown increasingly receptive to these complaints, and several have found what they believe are ways around the 1992 ruling. New York, Illinois, Texas, Arkansas and Connecticut are among the states that enacted laws requiring online retailers to collect taxes if they had subsidiaries (such as warehouses) or affiliates (such as companies that drum up business) in the state.

Lawmakers in California have been debating similar measures for at least three years. The machinations this year, however, have been ugly on both sides.

After California lawmakers passed a measure (ABx1 28) this year requiring online retailers to collect the taxes, Amazon cut its ties to all of its affiliates — thousands of small businesses that were sustained at least in part by Amazon’s commissions — and argued that it was no longer obligated to comply. That point was in some dispute, however, because three of the company’s software-development subsidiaries have offices in California. So Amazon took matters a step further, collecting signatures for a referendum to overturn the law.

The tactic was remarkably cynical. Tax laws aren’t subject to referendums under the California Constitution, but ABx1 28 isn’t technically a tax law because it doesn’t create a tax or change an existing levy’s rate. It only changes the rules about who has to collect the tax. Amazon played down that distinction in its “More Jobs Not Taxes” campaign for the referendum, which branded the measure a “harmful new tax law.”

Legislators then tried to preempt the referendum through a parliamentary maneuver. They sought to pass a modified version of the law on an “urgency basis,” with a two-thirds vote. Under the state Constitution, measures passed on that basis aren’t subject to referendums. As lamentable as Amazon’s petition drive was, lawmakers were hardly draping themselves in glory by attempting to deny the public a vote.

In this week’s compromise, lawmakers agreed to push back the date when online retailers must start collecting taxes. The idea is to give Amazon and other retailers the chance to lobby Congress for a nationwide solution, rather than forcing them to comply with a patchwork of inconsistent state laws. If there’s no federal action by the time the new law goes into effect next September, Amazon has agreed to start collecting taxes on sales to California residents.

Ideally, Congress would level the playing field for retailers online and off. If state and local governments decide to tax the purchases their residents make, the burden to collect the tax shouldn’t vary from competitor to competitor. But there seems little chance of this particular Congress enacting a measure that causes people to pay more taxes, even if it’s just through more effective enforcement of existing laws.

Granted, the deal means the state won’t collect $200 million in taxes that it had counted on to help balance the budget. But Amazon’s intransigence meant that Sacramento wasn’t going to see much, if any, of that money. And had the issue gone to a referendum, it seems likely that Amazon’s anti-tax pitch would have carried the day — even though, again, the law doesn’t require anyone to pay more than they’re already obligated to pay. The compromise makes that question moot, as it should be. The right policy here is parity between competitors, even if it makes it harder for online shoppers to dodge the tax man.