In an effort to create a balanced budget and some fiscal stability in California, Gov. Jerry Brown and the Democrats in the California Legislature finally passed a budget over continued Republican intransigence over the Democrats’ desire to raise revenues rather than cut services like K-12 schools.
Democrats sidestepped Republicans by finding a means to generate revenue without raising taxes (in fact, sales-tax rates are down now) by closing a loophole in the law that had allowed Internet giants like Amazon.com and Overstock.com to avoid collecting sales taxes on their Internet sales. It is estimated that closing this loophole will add $317 million to the treasury.
Amazon has been avoiding collecting sales taxes since its inception in 1995. It has signaled that it will have no part of the new law and will likely fight it in the courts.
Amazon is playing on the ignorance of many shoppers who do not think they owe a tax when shopping at Amazon, giving the impression that one gets better deals on Amazon.
But this is not true. Sales tax is owed by California residents, regardless of where they shop, be it Amazon, Best Buy or elsewhere. The Board of Equalization estimates that taxpayers are paying an average of 1.4% of the total use tax liabilities they owe with “high-income” taxpayers paying an average of 4% of their liabilities.
Many knowingly evade their tax liability and shop on Amazon because sales tax enforcement at the consumer level is nearly impossible to enforce. They are essentially “tax cheats” and sadly, Amazon has become a “tax cheat-enabler.”
“You can’t give one segment of retail a 10% discount every day. It’s just not fair,” said Bill Dombrowski, president of the California Retailers Assn.
The loophole was created when the Supreme Court said Internet companies do not have to collect taxes unless they have a “physical presence” (such as stores or warehouses) in the state where they are collecting taxes.
Unlike some of their big competitors like Target and Best Buy, Amazon does not maintain stores in California. But Target and others cried foul, charging that Amazon’s practices are predatory and places them at a competitive disadvantage because they collect taxes at their retail and online stores because they have a retail presence here.
Democrats teamed up with the California Retailers Assn., Target, Best Buy, Walmart and other retailers to force Amazon and similar Internet operators to comply with the tax-collecting requirement by defining “physical presence” for an Internet company.
Under the new law, physical presence is not limited to stores and warehouses, but also includes having Internet “affiliates” or other subsidiaries based in the state. Amazon has about 25,000 affiliates in California and maintains operations for its Kindle and Internet Movie Database subsidiaries here.
But in a brazen move to circumvent the new law, Amazon ended its relationships with 10,000 of its California-based affiliates unless they move out of the state in order to bolster its legal argument that they do not have a physical presence here and therefore are not required to collect sales taxes.
This is just corporate extortion on Amazon’s part, which may backfire on Amazon because the company blocked businesses that were sending paying customers to them (that may be lost to them forever) and they still may have to comply with the state’s new law.
Republicans picked up on this and charged Democrats with “job killing” — rhetoric they know resonates with a public frustrated with a stagnant economy. The only problem is, it is completely disingenuous.
First, the new law does not impose any new taxes. It simply requires that taxes that are lawfully owed be collected by the merchant involved in the sale. Amazon is just being required to conform to business practices of almost every other company making money from California consumers.
Second, which of the 10,000 companies is leaving California? It is unbelievable that affiliate companies would pick up and move to another state simply to continue to get commissions from Amazon.
Many of these are home-based businesses that would likely link their website traffic to other sites like bestbuy.com that would pay commissions and sales taxes. Isn’t that the more reasonable and likely outcome?
Third, why should we as taxpayers buckle under to threats from a bully? We need fiscal stability — not favoritism to a few companies over the interests of sound public policy.
ALAN N. BOINUS lives in Laguna Beach.