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The Internet isn’t tax-free

What if California had $1 billion sitting around, unused, that it could put to work closing its budget gap, keeping schools open and preserving human services?

It does. The state loses more than $1 billion each year in uncollected sales taxes because most of the people who owe them have no idea they’re being tax deadbeats. Most would pay up if the companies they buy from would simply calculate the tax, add it to the bill, collect it and remit it to the state. That’s the way most purchases here work. Buy a La-Z-Boy recliner or an Ed Hardy hoodie at the store, and the retailer adds sales tax.

But some sellers don’t bother to do the calculation, leaving it instead to you, the buyer, to add up the 9.75% (in most of Los Angeles County; the state remits amounts over 8.25% to the counties) and send a check to the state Board of Equalization or, at the end of the year, to the Franchise Tax Board. You know those sellers -- they’re Internet giants such as Amazon.com and Overstock.com. They have revolutionized shopping, mostly for the good. But they exploit their position as out-of-state sellers by insisting that it’s up to their California customers to know about, calculate and separately mail in their sales taxes. (Technically, when the customer pays it directly to the state instead of through the retailer, it’s called a use tax. But it’s the same 9.75%.)

New York was in a similar position and did something about it. Lawmakers there said large Internet sellers without any actual stores in New York were ripping off the state and local businesses. After all, use taxes on goods purchased by online shoppers in New York were owed but being ignored, just like in California. New York stores that sold identical goods to walk-in shoppers were at a competitive disadvantage because they did have to calculate and charge sales tax. Lawmakers wanted to compel Amazon, Overstock and others like them to add the use tax on purchases by New York buyers.

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There was a roadblock. In 1992, just months before the coming of the World Wide Web and the first commercial Internet sales, the U.S. Supreme Court ruled that Delaware-based Quill Corp. could sell its wares in North Dakota through mail-order catalogs without adding state sales taxes. Sending a catalog into Fargo wasn’t enough of a presence to make Quill a North Dakota seller.

But a decade and a half later, the New York Legislature figured that if a nationwide seller such as Seattle-based Amazon had affiliated New York companies that sold books through the company or advertised for Amazon for a fee, it was more than just a mail-order catalog. It was an actual in-state presence.

So New York began requiring Amazon, Overstock and similar companies to add New York sales taxes to their sales to New York customers. One result was that nationwide Internet sellers began severing their relationships with New York affiliates.

California has considered a law requiring nationwide online retailers to calculate, collect and remit sales taxes that buyers are supposed to pay but rarely do. Assemblywoman Nancy Skinner (D-Berkeley) introduced AB 178, and Democrats included her approach as part of the budget proposal they sent Gov. Arnold Schwarzenegger.

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Based on the Legislature’s action, Overstock.com severed its relationship with its California affiliates. Now that Schwarzenegger has made clear he won’t sign the bill, he’s taking credit for Overstock reversing its decision and for protecting Californians from new taxes.

Wait a minute. The governor’s action did not protect anyone from having to pay more tax. Californians owe the $1 billion in use taxes anyway. The only question was whether the law should be changed to require online companies to charge the tax at the virtual checkout counter. It should; but there is a fairer way to do it than the New York-like approach in AB 178.

That approach, after all, does penalize the growing sector of California-based online businesses that match buyers with great deals all over the Web. Many of those businesses would be deemed affiliates, and would be dumped by companies that don’t want state ties to turn into requirements to add sales taxes.

A better approach would be to make the sales tax requirement broader. Not to require more or higher sales taxes, but to require any online seller that sells to Californians to add the appropriate tax instead of leaving it to the buyer to add it up and pay it separately. Such companies are, after all, pushing their virtual cash registers into the state. Whether some other California business does or doesn’t send the buyer to the online seller should make no difference. If a company sells online to a California buyer, whether the buyer got there by clicking on an ad, or going through an online clearinghouse, or going directly to the retail site, it is selling in California.

What about the Quill ruling? It’s the law of the land -- but it’s out of date. The world changed in 1994. Tax law should change with it. California should expect to be sued, and should expect to make its case to the Supreme Court that the Web gives a seller an actual presence in the state in a way that a mail-order catalog does not.

We sympathize with innovative online California businesses that were about to be cut off by Overstock, just as we sympathize with brick-and-mortar businesses that are being undersold by companies that don’t add sales taxes. And we sympathize with California shoppers who don’t really want to be tax deadbeats but are unaware that they owe use taxes on items they buy online from out-of-state sellers. For those sellers, though, it’s another story. They claim that it would be unfair to burden them with the chore of calculating sales taxes for each of the taxing jurisdictions in which they sell. Nonsense. It would take a little programming, and they’d be set. We strongly suspect that their real objection is that they don’t want to lose the unfair advantage of pretending their products are tax-free.


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