California Requires Internet Retailers to Collect Sales Tax

Date: 1 Jul 2011 | posted in: Retail | 0 Facebooktwitterredditmail

In what may well be the tipping point in a decade-long fight to level the playing field for local brick-and-mortar businesses, California this week enacted a law requiring Amazon and other large online retailers to collect state sales tax.

California is the seventh state to adopt sales tax fairness legislation, bringing the total U.S. population covered by such laws to 28 percent.  Its move could embolden other states.  Similar bills have been introduced this year in more than a dozen state legislatures.

Independent merchants have long complained that exempting Amazon and other online retailers gives these companies an unfair advantage.  In effect, states have been rewarding people with a 5-10 percent discount if they opt to shop online rather than at a local store.

Over the last two years, as many local retailers have struggled to keep their doors open, Amazon’s U.S. sales have grown by nearly 80 percent.

Many factors have contributed to Amazon’s growth, of course, but not having to collect sales tax has been one of the most significant.  This is perhaps best illustrated by the degree to which Amazon’s business decisions have been governed by an imperative to avoid sales tax.  According to CEO Jeff Bezos, when Amazon was founded in 1995, the company chose not to locate its corporate headquarters in California, despite the state’s deep pool of computer talent, in order to preserve its ability to compete sales-tax-free in this large market.

Since then, Amazon’s physical presence has spread to more than a dozen states, where it has built warehouses and other facilities that would normally trigger an obligation to collect sales tax. But the company has gone to great lengths to maintain its tax-free advantage in these states, either by structuring its facilities as separate companies or lobbying state legislatures for a special exemption.

Amazon continues to fight tooth and nail.  Yesterday, it fired all of its California sales affiliates — the 10,000 or so companies and individuals who earn commissions for using their blogs and websites to funnel sales to Amazon. The move seemed motivated purely by spite, since it will not alter Amazon’s obligation to collect California’s 7.25 percent sales tax.  The new law says an online retailer has a physical “nexus” in the state and therefore must collect sales tax if it uses in-state sales affiliates or has a corporate subsidiary in the state.  An Amazon division responsible for developing the Kindle is based in Cupertino.

Perhaps Amazon’s strategy is political; sales affiliates have become potent on-the-ground lobbying forces in other states and could help in a repeal fight in California.

In any case, Amazon is almost certain to file suit to block the law, which it did in New York when that state became the first to pass a sales tax fairness law in 2008.  Amazon claimed the law violated the commerce clause of the U.S. Constitution, but a trial court judge disagreed and upheld the law.   Amazon has appealed.

Most legal observers believe Amazon is likely to lose that case as well as any lawsuit it files in California.  The only real question is how long Amazon’s lawsuits might keep other states waiting in the wings — and how many independent small businesses will be forced to close their doors in the meantime.




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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.