Looking for ways to drum up extra revenue in the state of California, legislators are seeking to impose a new state sales tax on Amazon.com Internet sales. However the Internet giant says not so fast and if proposed laws are passed they will sever all ties with affiliate businesses in California.
Currently the Golden State has more than 10,000 Internet businesses that earn a living with Amazon.com.
“In no uncertain terms, Amazon has made it clear to me that the checks they send Californians will be cut off overnight if pending (sales tax) legislation aimed at regulating their operations becomes law,” said George Runner, former state senator and current State Board of Equalization member.
Runner posted a letter he received from Paul Misener, Amazon’s Vice President for Global Public Policy, in which Amazon leaders cite four pending tax bills—AB 153 (Skinner), AB 155 (Calderon), SB 234 (Hancock), SB 655 (Steinberg) as anti-business laws.
All these measures would require out-of-state online retailers, like Amazon, to collect sales tax on purchases made by Californians.
The assault on taxpayers would cost California much-needed revenue as well as thousands of jobs.
“If any of these new tax collection schemes were adopted, Amazon would be compelled to end its advertising relationships with well over 10,000 California-based participants in the Amazon ‘Associates Program,’” Misener explained.
Don’t think Amazon will actually cut ties with California?
Comments 39
Fine. Will suck. But the current sytem is ridiculously unfair to brick and mortor retailers OR e-commerce sellers that also have a physical presence in the state. It shouldn’t be, for example, that I pay sales tax on a HP server bought directly on-line from HP but that if I go through Amazon as the middle man I pay no sales tax . Frankly any jobs lost by Amazon in CA will be made up by shifts to California based retailers.
As conservatives we should be for LOWER taxes applied fairly and uniformly…..not taxes that are arbitrary and rife with loopholes that encourage inefficiencies (as economists use that term).
The 10,000 affiliates will lose their Amazon business in all FIFTY states and indeed worldwide — not just their California sales. Amazon will no longer do ANY business with CA affiliates. For those affiliates that find that this stream of Amazon revenue is significant, some will reluctantly choose to leave CA for a more business friendly state.
It’s likely that the result will be that CA will lose more jobs and more tax revenue. And customers will find they are paying more for alternative products.
This “loophole” may eventually be closed via federal legislation, but to make such adjustments on the sate level is counter-productive for all concerned.
Moreover, the sales tax IS owed in CA. Many are lying when they file their state income tax return — which specifically asks for purchases made out of state.
And even with Amazon shutting down CA affiliates, there are MANY ways for online or catalog buyers to purchase out of state — avoiding the CA “sales or use” tax.
One thing’s for sure — it is usually more efficient (time, fuel, pollution, cost of product, etc.) to buy online than to wander the brick and mortar stores. Oddly enough, the repressive CA sales taxes we have are encouraging smarter, more efficient methods of purchasing products — at the expense of CA merchants — and our state and local coffers.
Richard,
on the other side of the ledger are the retailers that match or beat Amazon’s price point but have to apply the 8.75% CA sales tax and thus lose the sale and the economic activity to the out of state retailer. Note too that on-line retailers with a PHYSICAL presence in the state (hence my HP example) are forced to collect sales tax even if the transaction is conducted on-line. Finally, and this is perhaps one of the most important parts of the story not yet captured, Amazon FORCEFULLY lobbied against providing the SBOE with imformation about who was ordering big ticket purchases so the BOE could enforce the laws you note the vast majority of Californians are breaking.
My beef remains that essentially Amazon’s business model is BUILT on the idea of facilitating what you acknowleged is a crime. Sales tax IS owed on those goods. Amazon relies on people breaking the law and thus finding a price break. And least I cast stones, we use them for certain things. Kindle is a great i-reader and thely have the slickest digital download feature. But then we also try to track purchases and declare it on our tax forms.
I wonder if anyone in Oregon uses Amazon. I suspect they do in great numbers. But Oregon has no state sales tax.
Could it be the convenience of online shopping from home/work? The ability to quickly price compare on the Internet? The time, gas and pollution saved? The superior offerings (as you point out, Erik)?
Go figure.
The car industry is ridiculously unfair to the buggy whip industry too. Let’s tax the heck out of cars too.
To Respectfully disagree – the Car Industry doesn’t have a business model that is built, in part, on facilitating the breaking of the law. If Amazaon would be willing to give the SBOE the information (or, like any other retailer, collect the tax at purchase and then send to state no beef). But what Amazon says is that they are EXEMPT from the collection obligations because they do not have a physical presence in CA. They then have lobbied against disclosing purchasers information to the state so that the owed taxes could be collected/enforced
If you believe that sales taxes are illegal than your like amazon. But if you do think, which I think is consistent with conservative principals, that laws are there to be followed, then their business model is fairly onerous.
I guess the best analogy would be this – would you support an employer poaching your employees with the following deal….
“We have found a loophole. We will pay you the same as Michael. But here is the deal….our HQ is located in the middle of the Pacific on an unclaimed atoll. We visit it for an hour at low tide each year. That means we don’t have to give the IRS your W-2 and we won’t withhold your income tax. You get a 30% bump in effective take home! Now if you get busted, well, your problem not ours. We are following the law and what you do is your own call.”
Capitalism is built on playing rules that are “fair” and which reward innovations that deliver product more effectively and efficiently – not figuring out a loophole that lets your customers break the law with relative inpunity.
Hmm…Erik, would I still get health insurance and my 401(k) match?
Part of the reason I left my job at the buggy whip factory was their lack of benefits.
– Michael – I hoped if you moved employers for lack of benefit it was to a public sector employer. As monopolists and tax eaters they are at full discretion to give you whatever they want until the punch bowl finally runs dry.
I might be willing to discuss some effort to ramp up sales tax collections — but only if it were matched by a commensurate REDUCTION in some other CA tax.
The LAST thing I want to do is give our state and local governments MORE money to keep doing what they’ve been doing so badly. Our motto at San Diego Tax Fighters is “Because we pay too much already.”
Based on that WONDERFUL YouTube of the guy forcefully asserting that “rents are TOO DAMN HIGH,” maybe we should add the “D” word to our motto.
As P.J. O’Rourke so famously opines, “Giving more money to politicians is like giving whiskey and car keys to teenage boys.”
Richard – I am NOT advocating this to feed the beast. I just believe in fairness. If you are going to apply sales taxes, they need to be fairly applied and not a capricious result of arcane differences in business model. Why, for example, should it MATTER if there is (or is not) a physical presence in the state if both goods are purchased and shipped through an E-commerce exchange? Yet in one case sales and use tax collected, in another the co. avoids and the consumer, in 90%+ of cases, breaks the law.
“As conservatives we should be for LOWER taxes applied fairly and uniformly” – Erik (see first comment above)
It is fair. All online business are treated the same and all brick-and-mortar businesses are treated the same.
When you purchase something in the city of San Diego you have to pay a sales tax. If I purchase the same item outside of city limits I do not have to pay San Diego sales tax. Would you be in favor of me paying San Diego sales tax if I purchase something in Santee or La Mesa? Of course not.
“Fair” is the battle cry of the left. Conservatives understand that your mom was right…life is not fair.
But, to be clear, when you purchase a car from a dealer in California, don’t you pay the sales tax based on your residence, instead of where you make the purchase? Speaking of fair.
It is. The law is clearly written that way. Nobody is taking an existing law and bending it to make things “fair” because technology has changed. Nor did anyone go to court and let a judge force the law to act that way.
Thor’s Asst, are you saying they implemented this car tax to level the playing field for the buggy whip manufacturer?
No, just pointing out one particular anomaly related to your question, “Would you be in favor of me paying San Diego sales tax if I purchase something in Santee or La Mesa?” For car sales, that is exactly the case. Maybe someone could answer why that is so…the non-researched assumption is that legislation at some point carved out an “exception” (if you can call it that) in the instance of car sales, so as to benefit a special interest. The guess is that buggies and buggy whip sales were not treated that way in their prime, prior to the automobile. But, it would be interesting to read a more learned explanation, including whether such an anomaly is fair or not. Good discussion here!
Actually a few posts above Michael makes a common mistake. Lets say I buy something on-line from Amazon. As it stands they currently have no recognized “physical presence” in CA and thus are not required to collect sales taxes on behalf of the state board of equalization. In contrast, if you order a server (see my original post) on-line from Hewlettpackard.com HP DOES have to collect sales tax, because they have that pesky HQ in Palo Alto. Again, both purchases made on-line, sales tax IS owed on both – just amazon is not required currently to collect it on behalf of the SBOE – thus facilitating the breaking of the law by the millions of CA that do not properly report the purchase on their tax form.
To the car example – I believe change in state law related to the fear (probably over 50 years old) that with Oregon not having sales taxes cars would be procurred in Ashland and driven south across the border. I would have to go dig into the state’s history with the Sales tax….and I have a root canal that I need to do before that 😉
I don’t know the reason for it either. I am guessing local municipalities influenced this in order to stop people from driving out of town to buy a car based on the sales tax rate of the municipality where the car dealer resides. So Santee wouldn’t be able to benefit because they choose fiscal discipline and can have lower taxes than neighboring El Cajon. All you El Cajon-ites can still buy a car in Santee, but you pay El Cajon sales tax.
I would assume that someone has made the argument that the buyer drives the car in his home town most often therefore they need the tax revenue for up-keep, but that is just statist speak for “we believe your money is a collective resource so give it to us”.
I want to reiterate that there is a difference because the sales tax on an auto sale based on your home residence is a clearly stated law. Like it or not, it was written to address this specific situation. The original discussion about online retailers vs. brick-and-mortar has no such law. Erik is attempting to apply old laws not intended to address an advance in technology to a modern business model.
Amazon and HP are two different business models. It is apples and oranges.
I do not like taxes at all. I don’t want more things taxed. I certainly am philosophically against using taxes to “level” the playing field for certain businesses or industries because it ends up helping to stop innovation by limping along a less competitive business model.
That being said, Erik, the way to go about doing what you want in this case is via new legislation. NOT interpreting old laws to fit your desires resulting in an audit, fines, and legal fees thrust on to a company that had no intention of breaking or skirting a law. If it is vague, the way to clarify it is through new legislation.
Michael – It is NOT online vs. Brick and Mortor. It is whether a retailer is required to collect the taxes on behalf of the SBOE….which the courts have determined is required if you have a “physical presence” in the state. You are avoiding a key point in my original post – that sales tax must be collected by HP even if the transaction is on-line. It isn’t the form of the transaction – it is the arcane and outdated idea of “physical presence” being the determinate. The proposed law would classify these marketing partners as representing Amazon’s physical presence in the state.
So understand, firms like many catalog companies trigger the requirement because they have offices, publishing units, distribution facilties in the state – even though they don’t have bricks and mortar presence.
And a key point of mine is that courts should not be deciding this. The fact that it went to court supports my position that to accomplish what you want requires new legislation. Not an activist judge.
The conservative Reinquist court interpreted that physical presence had to involve either an employee or an actual physical space. New legislation is what Amazon is fighting – which would classify the marketers as constituting employees and thus physical presence of the company.
Amazon also had struck down, by those activist judges damm them, a state law that would have require them to provide the states with the names of customers so that the various states could ask for the sales tax that was due. Amazon successfully argued before the courts that they shouldn’t have to do this – even though, for example, numerous big ticket retailers are required to provide that kind of information.
Since real world examples are better, I discovered that Buy.com – with an HQ in Irvine, collects the sales tax. Ditto Washington customers of Amazon.
Again, the point is that the business model facilitates the willful breaking of the law (the sales taxes ARE due on those items) and that Amazon creates pricing advantage by that fact. The sticker is the same (or higher at amazon – consumers are seeing that the company, however, lets them break the law with impunity and thus “save” money.
Taxes serve two purposes:
1. Providing revenue for a governmental entity and
2. Either encouraging “good” behavior (tax breaks for home ownership and having children) or discouraging “bad” behavior (extra taxes on tobacco and alcohol).
The current tax code discourages on-line businesses from having a physical presence or hiring employees in California – This makes no sense and I applaud the legislature for trying to correct it. I certainly wouldn’t mind if they also lowered the sales tax rate across-the-board, but that is a different issue.
This “fairness” rationale is indeed a slippery slope. Consider the push “to be fair” by levying a sales tax on SERVICES. After all, it’s only fair, right?
It’s been tried in some other states already, and is always a possible push here in CA. Indeed, it’s been proposed already.
Taxing services doesn’t work well in practice, as corporations hiring lawyers and accountants simply refuse to pay such taxes — by contracting with entities outside the state. And yes, you can try to impose a “use tax” on businesses in CA regardless of where they contract, but the results would be another strong reason for businesses to come to CA, or to stay here. And, perhaps more important, businesses outside CA would not use CA service firms.\
But, “fair is fair.” Or not.
Make that “another strong reason for businesses NOT to come to CA . . . “
Richard,
I am surprised to read your flippant criticism of the concept of fairness. Haven’t you been saying how unfair it is that public employees have better benefits than those readily available in the private sector?
Back to the topic at hand: Who said ALL services have to be subject to a sales tax? Couldn’t we exclude legal and accounting services and still tax haircuts, massages and auto repairs? Couldn’t we then lower the sales tax rate across-the-board and even start attracting businesses?
I don’t mind that public employees make more than the private sector. I object to the fact that they receive this excess windfall using the force of government to extract from citizens what these govt workers cannot earn in the open market — we HAVE to pay them. It’s a crucial distinction.
Many well paid people earn what many consider excessive income — CEO’s, ballplayers, entertainers, etc. But we consumers and taxpayers don’t HAVE to pay that excess – it is “won” by these winners in a marketplace of competitors. In stark contrast, govt employees rely SOLELY on force (a.k.a. government) to get what they want.
Hence we must whenever possible end the use of govt employees, and return to the open market to seek the best taxpayer bang for the buck from private enterprise.
In the end, “fairness” is a useless concept — as fairness ends up being whatever the powerful decide to impose via government.
VOLUNTARY interaction is a concept I can get behind — and do.
Hmmm, tax the everyday services people pay for. I LIKE that. Another regressive tax!
And it would indeed improve the CA employment picture — we’d need an army of FTB agents seeking those avoiding the tax — as services are not as easily traced as goods.
Combined with avoiding state and federal income tax and SS tax, here’s another reason for service sector entrepreneurs to work in the underground economy. Indeed, the further loss of these other tax sources would be one of those “unintended consequences” central planners never seem to foresee.
With these tax sources slipping further underground, this added service sales tax would be a great excuse to further erode our privacy, and perhaps to ban cash transactions all together.
That being said, a REVENUE NEUTRAL tax shift is at least worth discussing (and ultimately rejecting for the above reasons, but discussing nevertheless). But if the goal is to INCREASE state and local revenues at the expense of our hapless overtaxed CA population, I think you’ll find little support for such a measure. And for the proponents of such “fairness,” it’s really “revenue enhancement” that drives all such schemes.
Let me be perfectly clear…the courtroom is not the place to clarify law. The legislature is. I am not arguing that the tax is good or bad or that the companies are right or wrong. I am arguing about the process. It is obviously unclear and there are two sides of the issue, so go back to the legislature and either get them to pass a clear law either way. But until then, the side that is not collecting taxes has the advantage.
And Alger, I do not support the premise that tax code exists to punish what you consider bad behavior or reward what you consider good behavior. That is not the role of government and it is especially not the reason the government collects taxes.
Michael,
I think you need to re-read the article: It is the legislature, not the courts, that is considering the changes.
As for the tax code and “social engineering,” I wasn’t claiming that using taxes to encourage or discourage certain behaviors was necessarily a good idea, only that it is a fact that the tax code is used that way.
Richard,
Two quick responses:
1. All sales tax is regressive, but widening the base and lowering the rate would be good for the economy and good for business.
2. If we refused to write laws based on a concern that people would break them, we probably wouldn’t have any laws; we certainly wouldn’t have a speed limit.
Alger, please re-read the responses on this story. Erik brought up the courts. I simply gave my opinion. And you brought up social engineering. I simply gave my opinion. I don’t know how anyone could read what you wrote without thinking that you are suggesting and in favor of using the tax code to force behavior that the government approves or disapproves. But thanks for clarifying.
The subject is a little more complicated than just being fer’it or agin’it. And we were discussing it all. That’s all. I don’t know how I could have been clearer regarding the difference between my opinion of the process and my opinion on the subject matter. My apologies for confusing you, Alger. I was just saying that the procedure of going through the legislature is the proper role, but I disagree with where it looks like the result is headed. That is truly as simple as I can draft it. Anyway, thanks for the discussion.
A sales tax on services can result in a DE FACTO additional income tax on the self employed who have little overhead. And they are already being clipped by current taxes at a surprisingly high rate.
Consider the barber/hairdresser working out of their home — the spouse of someone with a normal employee position (say, the typical city employee making $60K a year) with some other investment/rental income.
The barber charges less than others (lower overhead) — benefiting customers and the barber alike. But let’s assume the barber is a dutiful citizens and pays taxes. On a $10 haircut, here’s how it currently breaks down:
Federal tax on the haircut: $2.50
State income tax on the haircut: $.93
SS tax (15.2%): $1.52
Total: $4.95 (49.5%)
Now add an 8% sales tax into the mix, and assume the barber keeps the price at the same $10. The total tax is $5.65 (ignoring the deductibility of the sales tax on a Schedule C). Even if the sales tax is added to the customer’s bill, the total tax on revenue collected is over half of the total “sales price.”
Also let’s ignore the barber’s paperwork filing costs of getting into the sales tax collection business.
An interesting consideration is this: How many service SE providers currently paying these taxes are going to go underground with this additional tax? “We” will not get their sales tax, but also not collect the other three taxes, which amount to far more.
One things for sure — the central planners will be surprised that they don’t collect the sales tax anticipated, and the income tax and SS folks will never understand the increase in non-compliance — and lost revenue.
And one bonus — higher tax rates will add to our HUGE criminal class of citizens. A class which, BTW, already likely includes every reader of this list (a topic for another time, perhaps).
Alger suggests a lower sales tax rate from taxing services is a good idea — sound economics — whatever. But I’ve not heard proponents suggest lowering the sales tax rate.
When Maryland decided to tax computer services, they kept the same sales tax rate on everything else. I think you’ll find similar results in service sales taxes imposed in Texas and Florida. Indeed, it’s not unusual for the sales tax to subsequently be raised — on the local if not the statewide level.
Put economic theory aside and deal with reality — this push is to extract MORE money from citizens. Improving the “efficiency” of taxation is not a goal.
Richard,
I don’t care what you think the proponents are proposing, I was proposing a lower rate covering more items. And in actuality that is what many other legislators have talked about.
As for the hairdresser example, working out of your home, unless zoned for with a separate entrance, is illegal and as you did finally point out, sales tax is paid by the customer so in no way does it “result in a DE FACTO additional income tax on the self employed”
Well to chime in, I am NOT a big fan of taxing services. The problem is that unlike the purchase of physical goods (our Amazon example not withstanding), the purchase of services is MUCH more likely to be done remotely. Yes, one can’t really hop on a plane and go get a haircut in another state. But when faced with a tax bill of 80,000 to 160,000 on top of the audit you can bet your house that publicly traded companies in California are going to go out of state for their accounting work. Ditto legal services. Ditto banking. Since businesses are a prime user of non “place-based” services it would be a strong incentive to buy :”out of state”.
Moreover, conflating data sometimes clouds more than it illuminates. Some of the big reasons for the increasing share of GDP spent it services is ncreased consumption of healthcare AND some strange definitional issues with government economists (the principal one that much R&D and telecommunications is classified as services and not “manufacturing”). I don’t think ANYONE is proposing that we slap on a 8.75% surcharge on your hospital bill.
Michael – I think YOU initial brought up the courts. To be clear about the narrative, after the Renquist court affirmed that you needed to have a physical presence in a state before a firm could be compelled to collect sales taxes, the legislatures in NY and I believe a couple of other North East states passed legislation defining the marketing affiliates as constituting such a presence. Amazon is current litigating. Texas said that the creation of a seperate company to handle order fulfillment at a warehouse was an artifice and handed Amazaon a $220 million tax bil. Amazon is litigating. Amazon does the same thing in California – creating a subsidary to design and assemble the kindle but which is not, for the purposes of tax law, a company that signifies a physical presence. CA is thinking, as per the original post that started this, of enacting a law that would mirror NY’s. Amazon is threatening to cut the marketing affiliates off (and in a classic one for capitalism, the retailers that current DO collect sales tax have told those people – “Hey, check US out, we will pay you to marketing for XXX.com!”
Seems that it is AMAZON that, on the whole, it is AMAZON (and its from the DMA) that is using the courts to try to be “activists.” And I never brought up the courts – only discussed them in passing after you did.
Seriously, they operate a business that exists at best in the grey areas of the tax code. Defend the principal but they are NOT the poster child you think they might be.
Alger opines that “. . .working out of your home, unless zoned for with a separate entrance, is illegal . . . ”
REALLY??? In San Diego??? I don’t think so.
You’d be amazed how many people work part or full-time out of their home — and almost none have such a dual entrance. Nor is one required that I’m aware of. You have a source for that?
Here’s the City of San Diego 2009 guide for home businesses.
http://www.sandiego.gov/development-services/industry/pdf/infobulletin/ib540.pdf
Point us to the part that describes that requirement.
I’m delighted to hear your opinion on a revenue neutral adjustment to the tax. You claim others (presumably legislators) have proposed such a measure.
Show me the bill. ANY bill in the legislature, passed or not, that advocates such a revenue neutral modification. In any state.
At most, there might be SOME reduction of the goods sales tax rate, but for every 20 cent reduction in such taxes, there’s likely be a dollar or more increase in tax grabbing on services. The net result will be a MAJOR increase in tax revenue for government at our expense — otherwise there would be no interest in this sort of legislation.
It’s all just a smoke screen for raising taxes. But then, you KNEW that, didn’t you Alger?
Richard,
I stand corrected – The State Board of Barbering and Cosmetology does allow for home salons (http://www.barbercosmo.ca.gov/forms_pubs/faqs.shtml#es10). There are some requirements, but not the one I posted and they all seem easily attainable.
I will stand by my primary point that a revenue neutral overhaul of our sales tax system would be economically beneficial for business as well as the State as a whole.
As for you questioning my motives, I guess you wouldn’t be Richard Rider if you didn’t. However, I am sorry to disappoint your cynical side (seemingly your only side); I really did want to simply discuss a good idea that most readers of a right-of-center blog should get behind.
Your attitude as well as the attitude of those on the left who seem to fear any reduction in taxes is probably why no one has actually proposed a bill – but I know a few who will tell you in private that this is not only a good idea, it is also a necessary one since our economy is much different than it was 50 years ago.
I agree with your premise that the tax system can be improved from a productivity standpoint. Big deal.
I also favor world peace. I suspect the latter is more attainable.
Your assertion is just empty posturing. It’s not germane to the world we live in, nor to the issues at hand.