Monday, September 05, 2011

Amazon offers California a sales tax compromise

Two months ago, the California Legislature passed a law requiring Amazon to collect sales tax. Amazon refused, dumped all its California affiliate stores (costing the state tax revenue), claimed they were not operating in California and started a petition campaign for a ballot measure to overturn the law. In the meantime, they are not collecting tax, and when the measure qualifies for the ballot, the law will be temporarily suspended.

Now Amazon has offered to build two warehouses in California and hire 7,000 workers if the legislature will put the issue off for a few years. (Does the 7,000 include the affiliates they cut off or would it be the reinstated affiliates plus 7,000)?

I live in California and love it that Amazon is tax free -- often choosing them over another store for just that reason. Regardless, I think they should drop the referendum and start collecting sales tax and I predict they eventually will have to.

Here are a few reasons why (in no particular order):

  • Amazon asserts that an online sales tax would cost California jobs. I find their faith in low taxes as an economic silver bullet reminiscent of the Tea Party. It will cost some jobs and pay to create or maintain some others. No one knows the net change.
  • The California Retailers Association (Walmart, Barnes and Noble, etc.) says Amazon's refusal to collect sales tax cost California over 18,000 jobs and a $4.1-billion loss in sales resulting in over $7 billion in lost economic activity in 2010. I trust their figures about as much as I trust that Amazon gives a hoot about California jobs.
  • California loses jobs when consumers pay higher taxes and when Amazon affiliates are zapped, but we also lose jobs with the bankruptcy of Amazon competitors like Circuit City and Borders Books. The same goes for laying off teachers, state employees, and others.
  • I believe California needs added revenue and am willing to pay my share.
  • I worry that a sales tax might be a burden for the poor, but I bet Amazon shoppers are relatively affluent. This is an empirical question that Amazon could answer.
  • The early rationale for an online sales tax exemption was that it would allow Internet e-commerce to take off. Amazon has taken off.
  • Amazon thinks it might be cheaper to do a ballot referendum than to fight the law in court, but what about the cost of a referendum to the taxpayers?
  • The media and advertising business will surely like the referendum – both online and brick-and-mortar retailers will spend tons of money on misleading, simple-minded ads.
  • Amazon cut off their California marketing affiliates in order to claim that they had no operations the state, but seven California addresses are on the list of United States Subsidiaries at Amazon’s Web site.
Let me know what I have left off this list – on both sides.

California is a large, precedent setting state, and this battle has national implications. Wikipedia lists 13 states where Amazon is in a controversy over sales and use taxes. My fearless prediction is that the list will grow, and, in the long run, we will be paying tax on online purchases. That will change the retail landscape (and maybe Amazon will open stores when it happens).


  1. I was living in Oregon when the Feds tried to instate (pun intended) a law to tax e-commerce on a federal level.

    At the time, Ron Wyden (D, OR) fought it in the Senate. I was both active in D politics at the time and VP/Marketing and BizDev for the 3rd fastest growing private company in Oregon (the other two were semi-conductor companies) so I was following this pretty closely.

    Sales tax forms for out of state payment are awful. At best, they are like your 1040ez. At worst they are like an elaborately itemized 1040 with itemizations of EVERY DAMN TRANSACTION involving a taxable item.

    I guarantee, if the states get greedy on this, they will not stop thirty seconds to revise their sales tax forms, and every mom&pop mail order company will be gone.

    Because this isn't likely to hit just Amazon. It will hit any catalog or ad sales that crosses a state line. And that includes TV ads, radio ads, Girl Scout cookies, catalogs you pick up in the back pocket of your plane seat or at your doctor's office, or buying an e-book from an author who just decided she has a brilliant idea about online marketing.

    Slippery slopes get lubricated with money. If California does this, then 35 states will follow suit, and the rest will trickle in, and a lot more than 7,000 job will go down that slope and hit the oubliette at the bottom, just based on the reporting requirements.

    The traditional answer is, those people shouldn't have been in business to begin with.

    But then, this is a rule that's been part of "mail order" business for over a century. It's a reasonable expectation.

    Maybe shutting down millions of small entrepreneurs for the sake of one big fish is not the answer this year, or for the next few years.

  2. > Sales tax forms for out of state payment are awful. At best, they are like your 1040ez. At worst they are like an elaborately itemized 1040 with itemizations of EVERY DAMN TRANSACTION involving a taxable item.

    I hear you, but that sounds like something that could be fixed with uniform, simplified, electronic reporting of aggregate sales. If the data processing system were rational, do you think it would work?

  3. California and the other states that are taking action should get together and jointly design a feasible reporting and collection system. That would take some of the steam out of your warning.