September 7, 2011, 3:43 PM

California Democrats say ‘Yeah, right,’ to Amazon’s proposed tax deal

The e-retailer wants to build warehouses in exchange for a sales tax reprieve.

Paul Demery

Managing Editor, B2B E-commerce

Lead Photo

Democrats in California’s State Legislature, where both the Assembly and Senate have Democratic majorities, came out swinging this week against a proposal by Amazon.com Inc. to generate about 7,000 jobs after building several distribution centers in the Golden State in exchange for a two-year exemption from having to collect sales taxes from California residents.

Democratic legislators argued that, rather than create new jobs, Amazon’s plan would continue to add to the loss of jobs in the state’s retail stores.

"Amazon shouldn't get to end-run the law by cynically promising jobs that aren't going to materialize," says  Assemblywoman Nancy Skinner, a Democrat from Berkeley who chairs the Assembly Rules Committee. "California continues to lose real jobs in small bookstores, large retailers and other stores in our communities. The Amazon proposal doesn't pass the smell test—I call it a sham-azon."

Adds Assembly Speaker John A. Pérez (D-Los Angeles): "Every bricks-and-mortar store in California must collect and pay sales taxes. That means thousands of small businesses, as well as large retailers, are shouldering a burden that online retailers like Amazon have been exempting themselves from, and that's not fair.”

Perez, Skinner and other Democratic legislators contend that, under the sales tax law passed in June as part of the state budget legislation, the state stands to receive up to $200 million a year in sales tax revenue that had gone uncollected. And the California Retailers Association says that the state’s bricks-and-mortar retailers are losing about 18,000 jobs per year because of competition from online retailers, a figure estimated to increase to 34,000 by 2013, says Bill Dombrowski, president and CEO of the California Retailers Association.

Amazon, No. 1 in the Internet Retailer Top 500 Guide, declines to comment.

Republican state officials, however, take a view sharply different from that of their Democratic counterparts. For one thing, says George Runner, a former state senator who is now a Republican member of the California Board of Equalization, which oversees the state’s tax collection policies, it’s highly unlikely that California will receive $200 million in tax revenue under the new law. That’s because online retailers are taking steps to avoid having to collect sales tax rather than abide by the sales tax collection provisions in the special “budget trailer” legislation that became immediately effective when signed into law by Gov. Jerry Brown, a Democrat, in late June. “BOE staff is not aware of any online retailers that have registered with the BOE to collect sales tax” because of the new sales tax law, Runner wrote in a Sept. 2 letter to California legislators.

There are other factors that could prevent the law from resulting in increased sales tax revenue, Runner adds. If Amazon.com succeeds in getting a referendum approved for the ballot next June to let voters decide if the sales tax law should be rescinded, he says, the sales tax collection requirement for online retailers will be put on hold until after the referendum. He adds that the equalization board’s legal staff believes it is “extremely likely” that one or more major online retailers will choose to litigate rather than collect the tax, resulting in years of court battles.

The California law requires online retailers to collect sales tax in California if they operate in-state subsidiaries or get customers through web links on affiliate web sites, such as blogs and other special-interest information sites. In effect, the California law, similar to laws in other states, provides a way around federal law that says states can’t force retailers to collect sales tax unless they have an in-state physical presence, or nexus in legal jargon, such as stores and distribution facilities.

Runner also contends that hundreds of online retailers in California have severed ties with affiliates to avoid the law, resulting in a loss of affiliate revenue as well as jobs. The Performance Marketing Association, a trade group for affiliate marketers, reported survey data this week showing that, since the California law was passed in June, 37% of affiliates had lost more than half of their income, 22% had closed their affiliate businesses, and nearly 32% had moved or were planning to move out of state. The group says it based its findings on a survey of 500 of the state’s 25,000 affiliates.

“Learning from history, we know that [the California sales tax law] will not persuade out-of-state retailers to start collection of sales tax,” says Rebecca Madigan, executive director of the association. “We know this because other states that attempted to pass similar laws arrived at the same results, no new sales tax materialized.”

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