So I’m not one for “I told you so” but… Okay, who are we kidding? I totally am.
About two and a half years ago, I suggested that California, despite its reputation as a mecca for start-up, tech and internet based businesses, might consider aggressively pursuing existing sales tax laws in an effort to draw in online sale to boost revenues.
A few months later, in May 2009, California began exploring ways to enforce collection of sales tax from online sales. They were specifically interested in New York’s view of taxing online sales based on an expanded view of nexus. Nexus is the legal concept of presence; states must establish a connection between a taxpayer and the state in order to impose taxes. That used to be an easy test: are you located in the state or not? Direct mail catalogs changed the question a bit. And online sales have challenged it even more.
New York took the aggressive position that Amazon.com affiliates inside the state were enough to establish nexus for the company. If that were true, then Amazon.com would be required collect sales tax on all sales inside the state. Amazon.com challenged this notion in court and lost. The court found that the internet giant “did not even come close” to proving its position that the law was unconstitutional.
No doubt emboldened by this decision, California tried its hand with a similar law. At the time, I noted how relatively quiet Amazon.com remained during those efforts, considering how loudly they screamed at similarly-themed efforts in North Carolina, South Carolina, Rhode Island and Hawaii.
The law passed but was immediately vetoed. Then-Gov. Arnold Schwarzenegger publicly indicated his opposition to the law, claiming that it would kill business in the state and likening the measure to a tax hike.
With Schwarzenegger out of office (and I feel comfortable that this is a permanent condition), California is trying again. This week, the California State Assembly passed a law, AB155, that would require online retailers, including Amazon.com, to impose and collect sales and use taxes. The vote was overwhelmingly positive in the House and now moves to the Senate. Supporters of the bill went out of their way to note that this is not a new tax but forced enforcement of an existing tax.
Those opposed to the bill were quick to label it as “anti-business.” That may be a bit of a misnomer. Many of the biggest retailers in the state, including Wal-Mart and Best Buy, have backed efforts to tax online sales (as they did in South Carolina). Amazon.com represents their competition; since Wal-Mart and Best Buy have real brick and mortar stores, they have to charge sales tax while Amazon.com does not. Those big box retailers have aligned themselves with the traditionally small stores they have crushed chased out of town run out of business increasingly replaced. But, as I’ve said before, politics make for strange bedfellows.
Assuming that the measure becomes law, it would generate some serious revenue for the state. It’s been estimated that there are at least $1 billion worth of sales taxes in the Golden State that escape collection. Speculation is that $83 million of those sales taxes can be attributed to Amazon.com.
So what does any of this mean for you and I? Everything. New York and California are two of the largest states in the country and their populations spend a significant amount of dollars. If California joins New York in successfully imposing a sales tax on online sales, you can bet other states will take notice. Many such states have quietly watched on the sidelines as Amazon.com has picked battles with other states (such as my home state of North Carolina) but this one is the big one. A win for California here will mean one of two things:
1, Other states will adopt a similar law.
2, This matter finds itself in the Supreme Court.
My money is on both.
