July 31, 2011, 12:00 PM

Amazon goes to California's voters in a bid to repeal the state's new online sales tax law

Amazon.com Inc. has once again grabbed center stage in a battle over sales tax, this time in California where it has filed a petition for a referendum on whether the state should repeal a recently passed law that requires online retailers to collect sales tax if they do business with in-state affiliate web sites or have in-state subsidiaries that operate things like distribution centers.

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Amazon.com Inc. has once again put itself front and center in the ongoing battle between online retailers trying to avoid collecting sales tax and states trying to shore up budget deficits.

Among its run-ins with state sales tax legislation, the world's largest web retailer already has the online retailing community on edge awaiting the outcome of its court challenge to a New York State law that requires web retailers to collect sales tax if they get sales leads through in-state affiliate web sites—the outcome of which could set a precedent for similar laws and legislative efforts in other states. Now, Amazon has grabbed center stage in California, where it has filed a petition for a referendum on whether the state should repeal a recently passed sales tax law.

The California law, approved in late June, is in two parts: like so-called "Amazon Tax" laws in New York, Arkansas, Connecticut, Illinois, North Carolina and Rhode Island, it requires online retailers to collect state sales tax from California customers if they advertise with affiliate sites based in California; and like laws in Kansas, Oklahoma and South Dakota (and, at presstime, pending in Texas) the California law 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 their sites.

Targeting $200 million

Proponents of the new law, 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 says the law hurts California's economy because retailers— including Amazon and Overstock.com Inc.—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 referendum, calls the Amazon tax unfair and unconstitutional. "We think the voters of California understand that and will vote to repeal," he says.

Some state tax officials agree. George Runner, a Republican member of the Board of Equalization, the state's elected tax commission, 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."

But state Sen. Loni Hancock, a Democrat from Oakland who supported the online tax law, takes the opposite view. "It is unfortunate that Amazon continues to argue for a tax loophole that gives 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."

zak@verticalwebmedia.com

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