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.

Zak Stambor

Managing Editor

Lead Photo

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.“

Comments | 8 Responses

  • I feel that Amazon is like a spoiled child, threatening to pitch a fit if it doesn't get its way. Come on, really? Why should Amazon and Overstocked.com not collect taxes when other businesses do? What makes them so special? Forgive me if I'm stating the obvious, but we all know that Amazon has a competitive advantage over other retailers because they do not charge tax. I'm sorry, but I think Amazon should just shut up and step up and starting collecting sales tax. If they want to play with the big boys, they need to start acting like one.

    • "Spoiled child" is not how I would want my company or myself to be known.

  • What makes them so special? Because they're not located in California and are being targeted by liberal legislators who see them as deep pockets to be picked. You want to treat everyone the same, fine, no problem. But targeting only specific companies based on a very specific criteria designed specifically to target one kind of company is wrong and they ought to fight it.

  • This is an attempt by a state desperate to collect more tax dollars that will, in all likelihood, backfire and actually result in fewer tax dollars collected. This affilate tax law severly handicapped small businesses and bloggers who relied on revenue generation from showing Amazon and Overstock ads on their site. Where these sites formerly earned commission for driving traffic to Amazon...for which INCOME TAX would have already been paid to state of CA...CA now wants to also collect sales tax for a purchase resulting from that click, regardless of existing interstate commerce laws. Ecommerce businesses aren't the bad guy here, a greedy government (aka, politicians) with a lack of understanding of basic economics is. Be carefull who you sic govermment after. Sooner or later, they'll be coming after you. I don't live or work in CA, and hope that this law gets overturned to help deter other states from passing such a lame tax law.

  • These are comments ignorant of history and the law. California has always had a strong unitary tax. A unitary tax means that every corporation that does business in California is taxed regardless of where its headquarters may be located. The issue is called "nexus": if there is sufficient presence of a company in the state, California will tax you. In the case of Amazon, it relies upon telecom networks that are state-regulated to conduct its online business and the roads of California for delivery of its products. Every catalog sales operation must pay and so must Amazon, even if its interface is cooler. Amazon. by the way, knew of this likelihood when it entered California to do business. California's unitary taxation been a longstanding legal custom in California defended in the courts all the way up to the US Supreme Court. Amazon was leveraging a federal law that prevented California and other states from taxing e-commerce, passed a decade ago to give the fledgling ecommerce industry a chance to catch up with traditional retailers. Amazon knew that law would expire, yet it chose to do business in California anyway because California is more than 15% of the national market for Amazon's products. Amazon can try to get the law repealed. It will fail, just as the oil companies failed miserably to repeal by referendum California's green-tech legislation. Californians aren't saps. They know that Amazon thrives by exploiting an artificial advantage over other retailers, brick and click, and that every dollar they save buying an ebook for their Kindles comes out of the educational budget for their children. Greed can get you only so far. BTW, I was the Legislature's telecom policy analyst who first introduced California's policymakers in the mid-1980s to ecommerce with the intent of creating a good foundation for it to flourish in California -- and it has. (My committee invented the term "electronic commerce" in the process.) Ecommerce is a big part of California's success. Maintaining the quality of the digital and physical infrastructure for ecommerce is one way that taxes collected online returns to the vendor and the customers. No one wants to unfairly disadvantage Amazon, but to operate in California fairly and squarely, neither can it unfairly disadvantage others. Taking its greed to the polls will earn Amazon and Bezos a couple very black eyes in California. It should relent and become a good e-citizen.

  • I'm not sure what success in California is being referenced in the comments above, the state of California is a failure, in the midst of an economic disaster. Yet the proposed fixes are more spending, more regulation and higher taxes. . No matter how additional taxes, the demonization of capitalism, and the ever-growing sticky fingers of government are attempted to be defended, I will respectfully disagree. The part of this mis-named "Amazon Tax" bill that covers nexus is one issue, the other is that this tax effectively taxes LEADS. Not direct sales, but LEADS. This is just another assault by the haters of the free market, even "marketing" the bill under the guise of the big, mean Amazon monster. This tax is being challenged in court, as it should be, and will likely eventually be found unconstitutional. In the meantime, what is the effect of this tax? Amazon, Overstock.com and other businesses, who have been told clearly that they are the enemy of the state, will cut ties to California. California's own eBay may also be hit hard. Small affiliate businesses will be severely hurt or will disappear. The Performance Marketing Association says that the 25,000 small affilate businesses it represents will be forced to move or terminate. 25,000 small businesses lost. I fail to see how the loss of 25,000+ jobs & small businesses is good for any state.

  • All of us can go back and forth about should e-retailers collect taxes or not. You ALL know in the end as so many have brought up the word "greed", it will win in the short term. We will see legislation passed this year or next that will begin requiring e-retailers to collect tax. These States are desperate to continue their spending habits. The only back fire for States is Robbing Peter To Pay Paul can only last so long.....because Paul will come looking for more!! And then what? At some point then this "greed" that States and the Fed's have will end and everyone willl be taxed to death! The consumer is not stupid....they will continue to look online, but now will perhaps purchase the product, if available, locally down the street, especially if the advantage (no tax) is taken away. It's a win-win for the States because they will finally get the tax they feel they deserve either way! The loser in all of this is the small and mid-size e-retailer....they will dry up and you will see E-Bay, Amazon and OverStocked.com become the Internet Wal-Mart's of the World. Just like Wal-Mart shuts down many businesses in your local communities when they open up the Brick n Mortar. I really feel sorry that I brought children into this World and this is how we are leaving it for them and their kids, etc.....

    • We hope here that Amazon.com is forced to charge taxes. As a seller on Amazon, we are not allowed to collect taxes and have to pay out of our own pocket in a competitive marketplace. It is true that if the law passes in California, forcing amazon to charge taxes, and be a big boy finally, it will spread to the East Coast as well. Everybody has to pay taxes. and Amazon.com thinks they are above the law. Its sad. Ebay has to charge taxes, why should Amazon.com be any different with their scare tactics. Down with the spoiled child!

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