July 12, 2011, 1:49 PM

Amazon’s sales tax counter-attack

Amazon will ask California voters to overturn that state’s online tax law in a referendum.

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Amazon.com Inc. is taking on a new California law that aims to collect taxes from more online retail transactions.

Amazon, No. 1 in the Internet Retailer Top 500 Guide, has filed a petition to get a measure on the California ballot that would ask voters to repeal the law, approved in late June, that requires online retailers to collect sales tax from customers referred from in-state affiliate web sites. The law also clarifies that web retailers must collect sales tax if they operate corporate subsidiaries in the state for purposes such as distribution centers.

Amazon has until Sept. 29 to submit 504,760 signatures to get the measure on the ballot, according to the California Secretary of State’s office. If the retailer successfully gathers those signatures, the measure will appear on the ballot during California’s next statewide election, scheduled for Feb. 7.

Under federal law, states can require retailers to collect tax only if they have an in-state physical presence such as stores or distribution centers. That’s why the language in the California law was designed to enforce tax collection within those federal rules by stating that affiliate web sites and corporate subsidiaries constitute a physical presence, referred to as “nexus” in legal terms. Affiliates, often informational web sites and blogs, earn a cut of any sales online retailers close from clicks on ads on the affiliate sites.

Proponents of the new requirements on retailers, which cover retailers doing $500,000 or more a year in online sales to California residents, say it could raise about $200 million a year in tax revenue that currently goes uncollected. California has a state sales tax rate of 8.25%, plus local tax rates that range from 0.1% to 1.0%, according to the California State Board of Equalization. Amazon reportedly has declined to collect the tax since it went into effect July 1, calling the law unconstitutional, though the retailer did not immediately respond to requests for comment about that.

Amazon says the law hurts California’s economy because it—and other retailers, such as Overstock.com Inc., No. 27 in the Top 500 Guide—cut ties with their California web site affiliates to avoid tax liability. "This is a referendum on jobs and investment in California," says Paul Misener, Amazon's vice president of public policy. "At a time when businesses are leaving California, it is important to enact policies that attract and encourage business, not drive it away. Amazon looks forward to working again with tens of thousands of small business affiliates in California that were harmed by the new law's effect on hundreds of out-of-state retailers."

Jonathan Johnson, president of Overstock.com, who supports the measure, calls the Amazon tax unfair and unconstitutional. "We think the voters of California understand that and will vote to repeal," he says.

Some lawmakers agree. George Runner, a Republican member of the state’s elected tax commission, known as the Board of Equalization, says the law is flawed. “Clearly, the ‘Amazon Tax’ is not working,” he says. “After having terminated their relationships with thousands of California-based affiliate businesses, leading out-of-state online sellers continue to sell into California without collecting the sales tax.”

However, a group supported by retail chains such as Target Corp., No. 22 in the Top 500 Guide, suggests that Amazon is seeking an unfair competitive advantage. “Amazon.com’s actions prove that the online-only retailer will say and do anything to maintain an unfair competitive advantage over brick-and-mortar businesses in California,” says a spokesman for the Alliance for Main Street Fairness. “The lengths Amazon will go to evade collecting sales taxes—even spending tens of millions of dollars on a ballot referendum—should concern all Californians.”

Similar comments came from state Sen. Loni Hancock, a Democrat from Oakland who supported the online tax law. “It is unfortunate that Amazon continues to argue for a tax loophole that gave them an unfair advantage against California’s small business owners,” she says.  “All we are asking is that they collect and remit their fair share of taxes like everyone else.“

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