Proposed California Amazon Tax Grants One-Year Exemption for Internet Retailers
Internet retail giant Amazon.com has given up its battle against a proposed sales tax bill in California in return for a one-year window that grants Internet retailers a reprieve from collecting the taxes until September 2012. Despite concessions made between the online retailer and legislators, opponents of the so-called “Amazon tax” assert the bill circumvents the U.S. Constitution’s Commerce Clause and the 1992 U.S. Supreme Court Quill v. North Dakota decision.
AB 155 was approved by the California Senate’s Appropriations Committee in late August, and passed the California Senate and Assembly on September 9. The bill was sent to Gov. Jerry Brown, who signed the bill into law on September 23, 2011.
AB 155 is the second attempt by California this past summer to collect a sales tax from Internet and catalog retailers. In late June, Gov. Brown signed AB 28, which would have required Amazon and other online retailers to begin collecting sales tax on California transactions. But Amazon refused to collect the tax, launched the referendum to have it overturned, and severed ties with approximately 10,000 affiliates in the state.
In exchange for the one-year compromise exempting online retailers from collecting sales taxes, Amazon agreed to renew ties with its California affiliates, build distribution facilities anticipated to create 7,000 jobs in the state, drop efforts for a November ballot referendum against the tax it had initiated, and additionally work to support federal legislation to mandate sales tax collection in states that have adopted simplified tax-collection policies.
7,000 Tax Jurisdictions
The U.S. Supreme Court’s ruled in Quill v. North Dakota that states could not collect sales taxes from purchases made from catalog and online companies with no physical presence – or “nexus” – in that state. The 1992 ruling has been used to thwart other attempts to impose Amazon taxes in several states. States that have imposed Internet and catalog sales taxes have prompted online companies to close warehouses, distribution centers, and – as with the case of FatWallet.com in Illinois – company headquarters in those states.
At issue with many of these companies eliminating state nexuses is the estimated 7,000 different tax jurisdictions in the United States. Calculating the taxation on items sold over the Internet or through catalog sales, they assert, would be complicated and expensive, and would require additional staffing. The additional costs to these companies would be reflected in the final costs to consumers, who may curtail or cease altogether their online and catalog purchases rather than pay the additional costs.
Amazon tax proponents such as Sen. Dick Durbin (D-IL) – who earlier this year introduced the Mainstreet Fairness Act, which would allow states to enforce Internet retail sales taxes – say such taxes level the playing field between Internet and bricks-and-mortar retailers. Opponents, however, point out that many consumers have become accustomed to downloadable purchases of music and books that cannot be obtained through traditional retail transactions, and additional taxes will further hinder a struggling retail economy.
Small Businesses Hurt Most
Additionally, small retailers who rely on the Internet may feel the pinch more than Amazon and Overstock.com. Sam Richter, a Minnetonka, Minnesota-based sales trainer who sells books through Amazon, says imposing taxes on Internet sales could kill many small businesses that rely on the online sales channel.
“If this new law passes, it makes no financial sense for me to sell off my own Web site and manage the tax issues,” Richter said. “It would be a nightmare to manage all of that tracking and filling out forms in all 50 states. It’s the small business people who this will negatively impact,” he said.
“I think a lot of online sellers will just say it’s not worth it and stop selling online altogether,” Richter added. “I don’t have the ability to run the numbers, but my gut tells me that any sales tax income that a state like California will gain will be offset by lost tax revenue from the folks who just give up. This is a perfect example of government wanting to collect revenue, but in the end, they just make things worse for small businesses and ultimately they’ll lose revenue and potentially jobs.”
Laws ‘Constitutionally Challenged’
“What amazes me most about the legislation being introduced and passed in many of these states, including California, is that they are more than likely unconstitutional,” said Steven J. Thayer, partner with Chicago-based Handler Thayer LLP. “Most of these states are attempting to pass laws that they admit are constitutionally challenged, but they do it anyway,” he said.
Deborah Sweeney, CEO of MyCorporation.com, concurs with Thayer. “Political moves like this accomplish absolutely nothing; e-businesses simple pack up shop and leave the state, taking any taxable income with them. California successfully chased away business, and when Amazon attempted to fight back and put the issue to the voters, the overbearing Californian government began trying to stop that as well. This is all a huge waste of government time and accomplishes nothing.”
Thayer added: “There is a reason companies don’t do business in California or locate their headquarters there,” he said. “This should be a warning to anyone thinking about doing business in California – stay out -- and for those that are there – get out.”
“California Assembly Bill 155,” Introduced by Assembly Member Charles Calderon, September 6, 2011: http://e-lobbyist.com/gaits/text/78330
“California Assembly Bill 28,” Sponsored by Assemblyman Alyson Huber, December 6, 2010: http://e-lobbyist.com/gaits/CA/AB28