The impact of online sales tax

It seems that Amazon will be collecting tax on California sales in a year, and I expect that to become the national norm. What might the impact of the tax be?

The US Department of Commerce estimated that online shoppers spent $165.4 billion in 2010 and Vertex Inc. estimated the average state tax rate as 5.5224% during the first nine months of 2010. That says states are losing around $9.13 billion annualy in Internet sales tax.

That may be a small portion of our 14.7 trillion dollar GNP, but it would pay the salaries of a lot of state workers (especially professors :-), which would help the economy and make a lot of people happy.

But, aren't sales taxes regressive, taking a bigger percent of a poor person's income than a rich person's? For sure.

If it were up to me, I would raise revenue with a progressive tax that came out of the pockets of those better able to pay (like me) and corporations that take advantage of unreasonable loopholes..

But we are talking about sales tax, and my guess is that a sales tax on Internet purchases is relatively fair -- less regressive than general sales tax. Online shoppers tend to be relatively well off. They have computers, broadband connections to the Internet, credit cards, can accept daytime deliveries, etc.

We need emperical data on this question -- it would make a good thesis or dissertation if economists have not already studied it.

On balance, I favor taxing online sales, but if it turned out to be as regressive as our general sales tax, I would probably change my mind.

Regressive taxes are a bad idea for a couple of reasons. Most directly, they make the lives of poor people -- little kids and adults -- less happy. But they also reinforce the growing economic inequality in the United States.

What do

Namibia, South Africa, Lesotho, Botswana, Sierra Leone, Central African Republic, Haiti, Colombia, Bolivia, Brazil, Guatemala, Honduras, Hong Kong, Paraguay, El Salvador, Chile, Panama, Papua New Guinea, Zambia, Niger, Swaziland, Gambia, Zimbabwe, Dominican Republic, Peru, Sri Lanka, Mexico, Costa Rica, Singapore, Madagascar, Mozambique, Nepal, Uruguay, Ecuador, Rwanda, Philippines, Uganda, and Jamaica

have in common?

According to the CIA World Factbook, they are the only nations with higher GINI coefficients than the United States, suggesting that their income inequality is even greater than ours. That is not very good company, and it does not make for a comfortable, sustainable place to live.

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.

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).