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Tuesday, August 30, 2011

Who does the Amazon tax really hurt?

Anyone who follows the news these days can’t avoid hearing about the brouhaha surrounding Amazon.com Inc.’s resistance to collecting sales tax in California. Effective July 1st, a new tax law - which expanded the definition of having a “physical presence” in the state - dictates that online retailers like Amazon.com must collect sales tax from California customers who purchase their products.

Amazon’s reaction to the passage of the law was to cut ties with thousands of its California “affiliates,” individuals and companies that earn commissions by referring visitors to Amazon from their own websites. These affiliates, now considered a “physical presence” in California for Amazon, must now relocate outside of the state if they wish to continue working with the company.

Amazon is hopeful that California voters will take their side at the ballot box next year and choose to overturn this new law. On July 18th, the state attorney general's office approved the company’s petition for a statewide referendum, and it has been given permission to begin collecting the 500,000 signatures needed by September 27th to qualify a repeal measure for the next statewide ballot.

Under California law, when you order from an out-of-state retailer, you are supposed to keep your receipt and pay a “use tax.” Not many consumers abide by this and it is difficult to enforce. California Franchise Tax Board (FTB) data indicates “that about 0.4% of personal income taxpayers pay use tax related to remote sales on their personal income tax returns." (Read SBOE Economic Perspective). It must be noted however, that, according to the Board of Equalization (BOE), nearly all of the top online retailers actually collect California sales tax, so it is possible than many online shoppers do not even owe use tax. Additionally, BOE staff report that use tax reporting, although low, is actually improving, citing that reporting rates were .25% in 2007, .36% in 2008, and .42% in 2009.

If Amazon wins their ballot proposition election, California residents will be able to buy a book, laptop computer or a 10-speed blender from the company, tax-free. Of note however, a recent LA Times/USC poll found that 82% of Californians do “little or no” shopping online (Amazon Tax Poll).

The fact that tax is owed on a sale that isn’t transacted in a traditional California retail store is what’s making a lot of people upset.

On the other side of the coin, some residents feel that if Amazon prevails, the state is missing out on much needed tax revenue. This potentially harms many tax-payer funded programs, such as education and mental health care.

According to FTB 2009 data (the latest year for which complete data is available), Californian paid about $10.4 million in use tax payments on their personal income tax returns for purchases made from companies located outside the state. Preliminary data for 2010 indicates that use tax payments are likely to be up about 9% - putting use tax payments around $11.3 million. (Read SBOE Economic Perspective)

Amazon’s challenge to California’s tax code has been compared to a modern day Boston Tea Party. However, in the case of the Boston Tea Party, rebels were protesting taxation by England without representation by the colonies. In the instance of Amazon, tax payers are protesting paying taxes in a democracy where there are heard.

Ultimately, democracy at the ballot box will decide what lies ahead for Amazon. Voters will decide whether to overturn this law to keep money in their pockets, or leave it in place to fund their government operations.

Whatever the outcome – it will speak volumes historically of what we as Californians stand for and what ideals we hold important.