Saying it won’t force California customers to pay sales tax on their Internet purchases, Amazon.com is severing ties with 10,000 small businesses and individuals here who funnel shoppers to the online bazaar through their websites.
The defiant action came hours after Gov. Jerry Brown signed legislation that would have required Amazon to start collecting a 7.25% base tax on online purchases Friday because it has affiliates here that are paid commissions for steering shoppers to its website. Previously, only Internet companies with stores or operations in California had to collect the tax.
“This legislation is counterproductive and will not cause our retail business to collect sales tax for the state,” said Paul Misener, Amazon’s vice president of global public policy.
He wouldn’t say whether the company would sue to overturn the law, as it has in New York, where its case is pending. But California officials said they expect Amazon to file suit.
“It’s a huge fight,” said Betty Yee, a member of the state Board of Equalization, the agency that collects sales tax. “We are the biggest customer marketplace for Amazon and other online retailers.”
California merchants say Amazon and other online-only retailers have an unfair advantage because consumers can effectively get a nearly 10% discount by buying online.
That discount has helped Amazon thrive at a time when many brick-and-mortar retailers are struggling. Seattle-based Amazon racked up $34.2 billion in sales last year, up from $24.5 billion in 2009. Its stock is up nearly 14% this year, compared with just 5% for the broad Standard & Poor’s 500 index of blue-chip companies.
Supporters of the legislation signed by Brown on Wednesday say Amazon’s sales model denies the cash-strapped state treasury and local governments about $317 million a year in tax revenue. Taxable online sales in the state are more than double those of any other state.
At least five other states also have laws forcing Internet retailers to collect sales taxes for them, and many others are considering similar legislation.
Amazon is the largest of the Internet sellers who combined do business with about 25,000 affiliates in California who steer business their way. They range from one-person blogs to small and mid-size companies that employ scores of workers.
The much smaller Overstock.com also said it had severed ties with “hundreds” of its California affiliates to avoid collecting taxes.
One of the affiliates cut off by Amazon is Savings
.com, a West Los Angeles-based website that helps shoppers find bargains.
“This is a significant hit on our revenues and our profits,” said Loren Bendele, chief executive of the company, which has 80 employees. Bendele said the action would cost the company 15% to 20% of its business, and probably require him to lay off workers.
Another affiliate, David Wolf, said the money he made from Amazon wasn’t a lot — usually no more than $100 a month — but he used the extra income to pay for his cable or phone bill.
“If this is the way it goes, I’m concerned that other affiliate programs will go away too,” said Wolf, who works as a Web designer from his Corona home. “And then I’ll have to look for another source of income to fill the gap. It is real money.”
But Larry Darnell, who sells guitars and artworks on the Internet from his home in the Santa Cruz County town of Felton, said he believes Amazon should collect sales tax.
“I don’t think they’re a particularly good corporate citizen,” said Darnell, who like other affiliates was cut off by Amazon. “We all live in the system and contribute to the state, and they don’t want to do it. Quite frankly, the money the state is going to acquire is not too much, but every little bit helps.”
Despite Amazon’s assurances that it would not begin to collect sales tax, some shoppers were closing deals Thursday instead of risking having to pay the 8.25% state sales tax, which was lowered Friday to 7.25% after a temporary increase expired.
During a break from her job at a commercial real estate brokerage in Costa Mesa, Rebecca Thelin was on Amazon searching for a portable Weber barbecue grill that she was planning to buy that day to save on sales tax.
“It’s not that big of a deal for DVDs or books, but a barbecue costs more,” said Thelin, 32, of Foothill Ranch.
Yee of the Board of Equalization asserted that Amazon severing the ties with affiliates wouldn’t be enough to get it off the hook for collecting sales tax.
For example, she said, Amazon still has a research lab in Cupertino that develops Kindle e-readers and other offices in California of other related business entities. That presence in the state might make it liable under the new law to collect sales taxes.
Tax officials, meanwhile, said they are starting the process of drafting regulations to put the law in force. Soon, they will be sending notices to about 2,000 out-of-state Internet sellers that might be affected. Sellers are expected to begin collecting the sales taxes immediately. The first remittances to the state are due in about three months.
If Amazon is forced to collect, that could change the shopping patterns for scores of shoppers such as Carolyn West, a writer and blogger from Santa Clarita who said she and her husband bought many of their big-ticket electronics online.
“If I’m going to pay sales tax, what’s the point? I may as well go into a store — which is, I guess, the idea,” West said. Though Amazon often has lower prices than brick-and-mortar stores, “the savings isn’t worth it enough to go through the online purchase and wait for the shipment.”
California buyers have never been freed from the obligation of paying an equivalent use tax for their online purchases. But that tax is almost impossible to collect from individual buyers because most don’t know that the tax is due, state officials said.
States trying to tap into Internet sales have been trying to work around a 1992 U.S. Supreme Court decision. The court ruled then that a state can require out-of-state companies to collect sales taxes only if those companies have some presence in the state, such as workers, plants and offices.
An Amazon spokesman declined to say whether the company would file a lawsuit challenging the California law. Its New York suit argued that a 2008 law requiring sales tax collection violated the interstate commerce clause of the U.S. Constitution. Amazon lost at the trial court; its appeal is pending.
Overstock said it doesn’t plan legal action.
The affiliates that Amazon, Overstock and other out-of-state operations use to steer business to them are now looking for another way to make a buck, either by moving their operations out of state or by signing up with in-state Internet sellers, such as Barnes & Noble, Wal-Mart Stores or Best Buy, which currently collect sales tax on Californians’ purchases.
Some, like Savings.com’s Bendele, are blaming the state. “I’m absolutely dumbfounded that California has chosen this path,” he said. He is considering his next step.
Some experts said the fight has gone on too long.
“Amazon’s management should just bite the bullet and collect taxes,” said Charlie Wolf, a securities analyst at Needham & Co.
There needs to be a broader policy for online sales that takes into account the concerns of the states and e-commerce retailers, said Ray Valdes, a San Jose-based Internet analyst at market research firm Gartner.
“The issue is contentious enough and thorny enough that there’s no clean resolution,” he said. “If one side dodges the bullet for now, that’s not a stable situation.”