A looming California electoral battle pitting powerful Internet retailer Amazon.com against the nation’s largest chain stores is expected to be fought on the issue of jobs — with each side saying its position is better for the state’s struggling economy.
Officially, the fight is over the sales tax and Amazon’s refusal to collect it under a new California law that requires the Seattle company and other Internet-only retailers to do so as long as they have operations in the state.
The company said Monday that it would seek to qualify a referendum for the state ballot that would allow voters to overturn the new law.
But beneath the sales tax dispute is an escalating rivalry between Amazon and bricks-and-mortar retailers, which have seen an increasing portion of their sales go to the Internet.
Those conventional retailers say they are at a disadvantage because consumers perceive that they don’t have to pay sales taxes on Internet purchases, in effect giving buyers a discount of nearly 10%.
The stores also point out that they provide jobs — to salespeople, clerks, cashiers and more — and that California can ill afford to give a tax amnesty to Internet retailers that operate elsewhere.
“Amazon’s continued disregard of the law has cost this state over 18,000 lost jobs and a $4.1-billion loss in sales resulting in over $7 billion in lost economic activity in 2010 alone,” the California Retailers Assn. trade group said. “Their actions will continue to harm our schools, police, fire and the tens of thousands of small businesses who provide jobs and invest in our state every day.”
For its part, Amazon emphasized the jobs issue by saying that the new law has forced it to sever ties to 10,000 affiliates in California who are paid commissions to steer buyers to Amazon’s site by click-through links on their sites.
By cutting off California affiliates, the company hopes to avoid the key criterion — some presence in the state — that would make it subject to collecting sales taxes.
“This referendum effort is a vehicle for affiliate marketers to continue to do business in California, which translates to real income for the state as these businesses pay their income tax, employment tax plus other tax,” said Rebecca Madigan, executive director of Performance Marketing Assn., a trade group for affiliates. Amazon would not comment, instead referring to her statement.
And cash-strapped California and its local governments, which expect to recover an extra $317 million in taxes in the first year, will be on the stump too.
“Rather than follow the law, Amazon, a multibillion-dollar company, has decided to declare war on the community shop owners who support our little leagues, scout troops and local economy,” said Assemblywoman Nancy Skinner (D-Berkeley), one of the law’s authors.
California won’t know officially about any failure to comply with the law until Oct. 31 when companies remit their quarterly sales taxes to the state.
When it comes to jobs, mega-retailers Wal-Mart Stores Inc., Target Corp. and scores of others can make a stronger argument than Amazon. But experts cautioned not to count out Amazon, as well as consumers’ own greed in wanting to shave taxes of 7.25% or more off their final prices — even though they legally owe that money.
The fight is not over any tax increase; it’s about who is responsible for sending the taxes that shoppers owe to the state. Shoppers are required to keep track of online purchases and send the taxes to the state, but many don’t and the rule is difficult to enforce.
The looming referendum is “a gigantic, high-stakes battle that has been brewing for a lot of years,” said Los Angeles lawyer Darry Sragow, a veteran Democratic political strategist.
“Fundamentally, more and more economic activity, not just in California but around the country, is not subject to [collection of] sales tax,” Sragow said. “We’re talking about huge amounts of money.”
U.S. online retail sales grew 12.6% last year to $176.2 billion and are expected to reach $278.9 billion in 2015, according to Forrester Research Inc.
Although online revenue still accounts for a small percentage of total retail sales — about 9% — industry experts expect that figure to grow to as much as 30% over the next few decades.
That means cash-strapped states are likely to see more of their sales tax revenues shrink each year, while local and big-box stores and chains will continue to lose sales to the Web.
Analysts said economics was driving the online retail trend. It costs less to process online orders than to lease retail space and field sales clerks. Bulky items such as luggage and flat-screen televisions can be shipped from a warehouse instead of taking up floor space.
Consumers also are finding it more convenient to browse items online instead of driving to the mall, where stores may not have the right size shoe in stock or the exact color bedspreads they want.
But states and local governments said online-only sites deny them much-needed revenue. An out-of-state warehouse, for instance, doesn’t offer the same kind of jobs and economic boost as stores that hire clerks and cashiers.
The collection issue stems from a 1992 U.S. Supreme Court ruling that allowed states to impose the requirement on out-of-state companies only if those companies had some presence in the state, such as workers, stores or warehouses.
New York adopted a narrow law three years ago to address that issue, and Amazon sued. The case is pending.
A handful of other states also have enacted laws to capture unpaid sales taxes. California’s law is one of the broadest, giving it several ways to show how out-of-state companies have a presence in the state. Gov. Jerry Brown signed the bill into law late last month.
Meanwhile, local stores and national chains have been doing what they can to capture their share of the online sales market: installing Internet kiosks in their stores, launching “buy-online-pick-up-in-store” programs and offering more Web specials and free-shipping offers.
But Amazon remains the biggest player in the online market, and bricks-and-mortar retailers said its ability to avoid collecting sales taxes has been a big reason for its success.
“We believe the extreme measures that Amazon is taking to avoid collecting this tax underscores its view that not collecting sales tax gives it a significant — and unfair — advantage over large retailers ... as well as mom-and-pop retailers,” said Tom Aiello, a spokesman for Sears Holdings Corp.
Many retailers said they were holding internal meetings to discuss strategies. Wal-Mart, Target, Home Depot Inc. and others recently joined the Alliance for Main Street Fairness, a coalition that seeks to force online-only retailers to collect sales taxes.
“One company should not have special privileges in the marketplace,” said Danny Diaz, an alliance spokesman. “We will not cede one inch to Amazon.com.”
Bill Dombrowski, president of the California Retailers Assn., said he was meeting with campaign consultants Tuesday afternoon to discuss strategy.
“It’ll be television, it’ll be mailers, it’ll be everything,” he said. “We’re going to put whatever resources we need to put into this because it goes right to the heart of our business.”