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California set to impose 'Amazon Tax'

Will the Golden State succeed where others failed?

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A California bill that would require Amazon and other online retailers to pay taxes to a state reeling in financial crisis took another step towards passage this week when it was approved by the state Assembly.

"Each year, California loses over $1.145 billion in revenues as a result of unreported use taxes," wrote California State Assembly majority leader Charles Calderon in support of his bill, AB 155. "A large percentage of this use tax gap is attributable to out-of-state Internet sales."

The "Amazon Tax", as it has come to be known, is intended to enforce compliance with California's "use tax" law. This tax, established in 1935, is levied on the purchaser – not the retailer – when purchases are made out of state and brought into California for "storage, use, or other consumption".

Enforcing the use tax provision is a difficult feat – many if not most purchasers of goods from out-of-state retailers simply don't bother to report those purchases, and thus avoid the tax entirely.

California is constitutionally prevented from compelling an out-of-state retailer to collect the tax unless that retailer has an in-state "physical presence".

Calderon claims that AB155 has found a way around this conundrum. "This bill would establish a new and rather novel approach for reducing the use tax gap," he explains, "Specifically, it would impose a use tax collection obligation on 'out-of-state' retailers with in-state sister companies that provide services connected to the retailer's sales of [tangible personal property]."

Amazon, as might be guessed, isn't pleased with Calderon's bill. In a letter to a sympathetic Republican member of California's tax-collection entity, the oddly named Board of Equalization, Amazon's VP for global public policy Paul Misener wrote that if AB155 or three similar bills were adopted: "Amazon would be compelled to end its advertising relationships with well over 10,000 California-based participants in the Amazon 'Associates Program'."

Amazon Associates host ads for the mega-retailer on their websites, and are paid by Amazon when purchases are made through those ads. As Misener expls in his letter: "Other online sellers have similar programs and participants, which are more generally named 'affiliates'."

Whether you call them affiliates or Associates, Misener says that if Amazon dumps them, doing so would "only deny California-based organizations and individuals the advertising fees they currently receive from out-of-state retailers and, ironically, California's general fund could suffer a net loss in revenue as affiliates pay less income tax or move out of the state."

Amazon's threat to dump its California affiliates has historical teeth. When faced with similar tax efforts in North Carolina, Rhode Island, and Hawaii – albeit ones based on a different legal framework – Amazon did, indeed, dump their affiliates in those states.

In fact, Amazon has either faced or is facing tax action in 19 states from Arkansas to Vermont. Not all of those tax-related activities are anti-Amazon, however. This Wednesday in South Carolina, for example, the legislature granted the company a sales-tax collection exemption in return for a promised distribution center that Amazon says will provide 2,000 jobs by the end of 2013.

Over in Illinois, Amazon shuttered its affiliate programs when that state imposed a sales tax in a law with the marketing-minded name of the Mainstreet Fairness Bill. Colorado passed an Amazon Tax in 2010, but it was blocked by a federal judge. That state's House of Representatives then passed a bill to repeal that law last month, but their Senate balked, postponing action until next session.

Amazon also threatened to leave Texas if a similar bill, HB2403, passed in the Lone Star State. However, governor Rick Perry – widely rumored to become a candidate for the US presidency – made that threat moot by vetoing that bill this Tuesday.

Issuing a non-statement statement about his veto that did, indeed, sound airlessly presidential, Perry said: "I believe this legislation risks significant unintended consequences," and punted the discussion to "Texas lawmakers, consumers, retailers and technology experts" for a "thorough policy discussion" about "interstate commerce and the structure of state sales taxes in the 21st century."

And now California is taking its best shot, despite the fact that none other than the completely impartial Amazon headman Jeff Bezos has said that "the Constitution prohibits states from interfering in interstate commerce."

You may or may not agree with Bezos' constitutionally based argument against an Amazon Tax, but it's hard to discount another statement he made on the same matter: "Sales tax collection is very complicated." ®

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