Online retailers challenge California sales tax legislation
An estimated $100 million in potential sales tax revenue never makes it into state coffers – and won’t any time soon – even in a monumental year of budget shortfalls.
A bill to close what some call a loophole for Internet purchasers stalled in the Legislature earlier this year in the face of steep opposition from online retailers and business groups. Gov. Arnold Schwarzenegger, citing opposition to new taxes, vetoed a budget that would have expanded the state’s collections from online purchases.
Backers vow another try next year.
The issue is as contemporary as a computer, as old as the Constitution, and is changing almost day to day.
The ongoing question of what the state should receive centers on what constitutes a “physical presence” in the state for a retailer. This was easier to define before the Internet, when brick-and-mortar stores dominated. Online retailers who have such a tangible presence in California must collect sales tax.
But many online retailers simply have “affiliates” in California, not actual stores, and they don’t currently pay sales tax.
An affiliate is someone with a contractual agreement to advertise an online business. For example, a Californian who blogs about hiking could recommend hiking guides to readers and provide a link to an online retailer that sells them. The blogger is paid a commission by the online retailer.
Earlier this year, a state budget bill called for requiring online retailers with affiliates in California to collect tax on their sales to state residents.
Just the possibility that such a bill might pass caused Web retailer Overstock.com to drop its affiliates in California. The threat was short-lived, as Schwarzenegger vetoed the bill, and Overstock.com reinstated its affiliates.
But the reaction is indicative of Web retailers’ feelings on the issue.
Internet retailers, such as Overstock.com, based in Utah, and Amazon.com, based in Seattle, contend that their business with affiliates in California does not mean they have a physical presence in the state.
Assembly Bill 178, by Assemblywoman Nancy Skinner, D-Berkeley, proposes to make online retailers collect tax on California orders if the company also has affiliates in the state and those affiliates have generated $10,000 in annual sales from residents.
A legislative analysis of the bill says that Amazon.com has “hundreds, if not thousands of affiliates in California who receive a commission on sales which they refer to Amazon.”
The bill is nicknamed the “Amazon bill.”
Amazon.com, which has cut ties to affiliates in several states that have proposed similar bills, sent a letter to Schwarzenegger opposing AB 178.
After a long list of powerful business interests voiced their opposition to AB 178 – and the governor made it clear he would veto the bill – Skinner opted not to pursue it this year, said Frank Russo, her chief of staff.
AB 178 has a two-year life, which means Skinner is eligible to push for it again in January, Russo said.
“The state still needs the money,” he said.
Continued financial woes for the state could bring a change of heart, he said. Because other states have passed similar legislation, he added, the movement can only gain support.
In actuality, Skinner’s bill aims to collect money already owed to the state. Under state law, residents who make purchases from out-of-state businesses that do not collect sales tax are required to pay an amount equal to the sales tax, known as “use tax.” It is up to the residents to keep records of what they owe and pay the taxes annually when they file their income tax returns.
“The plain unvarnished truth is this is not a new tax,” Russo said.
There is a line on the state return for use tax, but few residents fill it in, he said.
The State Board of Equalization estimates the proposed legislation, if passed, would generate $100 million more in annual state and local tax revenue.
New York, which passed a similar law, is expected to collect $70 million this year in tax revenue.
Amazon representatives did not return phone calls for comment.
Overstock.com sued the state of New York over its affiliate law, but lost in court. Company President Jonathan Johnson said an appeal has been filed.
His company, which began by selling liquidated stock and is now an online discount retailer, generates about 10 percent of its business from affiliates nationwide.
The company is adamant about what it will do in states that pass legislation like AB 178, Johnson said. “We just terminate our affiliates,” he said.
Johnson said he sends checks for as much as six figures to some California affiliates, income they would lose if the law passes.