California's Internet sales tax will reshape retail

Amazon VP Paul Misener

Two months ago, the California legislature passed a law requiring Amazon to collect sales tax, and Amazon retaliated by starting a state referendum drive to repeal the law and dumping thousands of California-based affiliates. Now, it seems a settlement has been reached in this battle. It's been reported that Amazon will drop its referendum drive in return for a one year moratorium on collecting sales tax.

If you live in California, your Amazon purchases will remain tax-free for the next year, but will be taxed after that.

That will help the state budget. Amazon VP for global public policy Paul Misener said that Amazon would also "welcome back tens of thousands of California-based advertising affiliates," which means yet more tax revenue for the state.

I favored and predicted this outcome, but did not expect it to be settled so quickly. My guess is that other states will follow suit -- California is large and influential and thirteen other states are already in conflict with them over tax collection. The New York Times has also reported on Amazon's tax problems in other states.

In a comment on a previous post, Shava Nerad, suggested that the mechanics of tax collection from 50 states with different rates, forms and procedures would create a record keeping nightmare. She worried that confusion over forms and procedure would drive thousands of small mail order and catalog companies out of business.

The one year moratorium gives online retailers and states time to work out uniform, simple forms and procedures for tax computation and reporting. It seems that Amazon wants to work out such a solution. Misener says they will "work with Congress and the states to obtain a federal resolution to the sales tax issue as soon as possible."

Amazon should take the lead in designing the system. They have a large stake in having it be simple and smooth, and they have been running a complex online service since the mid-1990s. It sounds like a good Amazon Web Services application to me.

The implications of this compromise go beyond California. It tips the on-line/storefront balance, and will impact retail business throughout the nation. We might even see some Amazon stores.