State lawmakers hunting for revenue are eyeing one source that could prove costly to millions of California consumers: Amazon .com.
The online retail giant has enjoyed an edge over many competitors in the state because it is not required to collect sales tax from residents who buy books, top-of-the-line plasma televisions, cases of diapers and thousands of other products from its website. The Seattle corporation has no store, warehouse, office building or other physical presence in California, and the state cannot tax such businesses under a 1992 Supreme Court decision.
Consumers here are required to pay sales tax on the goods they purchase at Amazon but almost never do, because the state has no mechanism for tracking Amazon purchases and collecting the money.
Now California is one of several cash-strapped states exploring a novel legal strategy that could force Amazon and others like it, including Overstock.com, to start collecting tax from their customers. New York launched the effort with a law that took effect in 2008. North Carolina and Rhode Island have passed similar laws; other proposals have advanced in the statehouses of Virginia, Illinois, Colorado and Hawaii.
The Democrats who control California's Legislature plan to put their own bid on the governor's desk this month in hopes of reaping up to $150 million annually for state and local coffers. The revenue would make only a tiny dent in the state's $20-billion deficit, but supporters say every dollar counts in tight times, and there's a principle at stake.
Amazon has "built an entire business model based on tax avoidance," said Assembly tax committee Chairman Charles Calderon (D-Montebello).
The state Senate approved the legislation Thursday as part of a deficit-reduction package, and it is expected to pass the Assembly as well.
Officials at Amazon, which is fighting the New York law in court, did not respond to requests for comment. But Jonathan Johnson, president of Overstock .com, called the California proposal illegal and predicted it would not harness any new taxes.
"We collect and pay taxes where we have a real presence," he said. "We don't have a presence in California."
The California proposal seizes on the thousands of online sales affiliates that Amazon contracts with to get customers to its site. Those companies advertise Amazon products, provide links to the company's website and get a percentage of the resulting sales.
Many of the affiliates are in California. Supporters of the Democrats' bill, ABX8 8, say that the connections amount to a presence for Amazon as well and that California should be able to force the firm to collect sales tax.
Gov. Arnold Schwarzenegger vetoed a similar effort last year after Overstock .com announced it would cancel all its contracts with affiliates in California. Overstock backed down after the governor's veto, but Johnson renewed his vow to cancel the contracts if the new measure becomes law.
Amazon has also said it would cancel its California contracts. Both companies have carried through with the threat in states that have imposed the sales tax requirement.
Such tactics should not drive lawmaking decisions, said Senate Budget Committee Chairwoman Denise Moreno Ducheny (D-San Diego): "California is big enough that we should not submit to that kind of blackmail."
Beyond the $150 million in annual revenue that tax officials believe could be collected from Amazon and other companies, there is a bigger bounty to be had. The proposals under consideration in California and other states are pushing some online companies, including Amazon, to come up with an alternative.
Some have signed on to federal efforts to create a uniform system for online sales taxation in all 50 states. With such a system in place, California could theoretically force every online retailer that sells to a state resident to collect sales tax, potentially garnering billions of dollars in new revenue.
But skeptics say that online companies' support for such a system is merely a way to buy time, because it is years from becoming reality. And a letter Amazon sent Schwarzenegger and lawmakers in June warned that a law to force tax collections would cost Californians jobs.
"If this new tax collection scheme were enacted, Amazon would have little choice but to end its advertising relationships with California-based participants," the letter said. The company also asserted that such a law would be unconstitutional.
Several tech companies and business organizations, including Google, EBay, Yahoo and the California Chamber of Commerce, have joined the fight against the idea. Some are concerned that their affiliate arrangements could be affected. In a letter to lawmakers last year, the companies said the proposal "could impede numerous ways that California companies currently survive or earn money."
California Internet giant Netflix, however, has joined independent booksellers, local governments and unions in championing the bill.
Schwarzenegger spokesman Aaron McLear said "it would be a tough sell" for the governor to support the bill after vetoing one like it last year.
Proponents are nonetheless aware that Schwarzenegger will be gone at the end of the year and that if a Democrat succeeds him, an "Amazon bill" will probably be signed.