California vs. Amazon.com in Sales Tax Battle

California, along with many other states, is broke. As part of an attempt to create more revenue, California passed a more aggressive law to force online merchants to collect sales tax. A 1992 Supreme Court decision stated that retailers that don’t have a physical presence in a state don’t have to collect sales taxes for sales to that state. But some states have passed new laws that redefine “physical presence” to include online affiliates and any subsidiaries.

Amazon.com affiliates are the thousands of websites like this one, where if you click on a link to a book or other product and buy something within a certain time frame, I get a commission of a few percent of your purchase. It’s a safe bet that the majority of blogs you read participate, even if the actual revenue is relatively small. But, by California’s new definition, if just one person is both an affiliate and lives in California, then Amazon.com has to start collecting sales tax from everyone in the state. What’s Amazon’s solution? Easy, cut off all CA affiliates immediately. That’s what they’ve done everywhere else. From CNN:

Other states that have passed the so-called “Amazon tax” in recent years include Connecticut, Illinois, New York, North Carolina, Arkansas and Rhode Island. The retailer has dropped the associates program in all these states, except New York, where it has a brought a lawsuit against the state.

Many other merchants that operate online like Overstock.com have been doing the same thing. They’d much rather lose the incremental revenue from affiliates than have to effectively increase prices for all customers from an entire state. For many website owners, Amazon is their primary source of income, and this move will force many of them to pick up and move.

At the same time, not paying sales tax is one of the expected benefits of buying from Amazon. (Even though in many states you’re technically still supposed to calculate and send it in manually, people rarely do.) This understandably annoys the national brick-and-mortar merchants like Walmart or Target.

As both a consumer and an Amazon affiliate, I am a concerned onlooker. These are two behemoths playing a high-stakes game, but I feel empathy towards those small businesses that just lost a huge chunk of their revenue overnight through no fault of their own. They seem to be collateral damage in this battle.

More reading: NYT, IBT

Comments

  1. You said: “I feel empathy towards those small businesses that just lost a huge chunk of their revenue overnight through no fault of their own. They seem to be collateral damage in this battle.”

    Don’t forget about the small brick and mortar businesses that are in-state and must charge sales tax. They have been aksed for years to compete against a behemoth that has a competitive advantage.

  2. The looters are at it again!

  3. Graham Lutz says:

    Way to Go, Democrats!!

    @chip – please don’t try to tell me that just because the looters make business hard for one group means they have to make it hard for all the others.

    These lawmakers act as if businesses don’t respond to incentives. Of course Amazon is going to stop doing the affiliate thing if that means that have to pay taxes on every sale in the state.

    Who are these people that get elected to government?

  4. Good point Chip. However, for online shoppers, shipping costs usually equal or exceed state sales taxes. I find that buying from a website that charges both sales tax and shipping is usually more expensive than shopping locally. Another thing to think about is that small online stores have much more competition than local stores. Not only do they have to beat the prices/selection/service of whatever is locally available to you, but they also have to compete with all other online stores.

  5. Money Beagle says:

    Eventually more and more states will continue to do this until Amazon is either going to have to drop their Affiliate program or it will be operating out of one or two states. It’s unfortunate for those who will lose their Amazon Affiliate status, but this isn’t the first state nor will it be the last, so hopefully they’ve been planning for this eventual day by widening their distribution to other avenues.

  6. I am not 100% sure how I feel about this. BUT, as a tax professional, I have to say the efforts of California to collect use tax (sales tax on out-of-state purchases) from individuals and SMALL businesses strikes me as extremely foolish. They have hounded most of our business clients – whom simply have NOTHING to report. What a waste of taxpayer dollars! The truth is if they really want to collect sales tax, the prudent thing is to go after the big retailers. This nickel and diming all the small people is penny-wise and VERY pound-foolish.

  7. This happened in Colorado a year ago, and with the startup community, it really had a major effect. Currently, there is an injunction against the law, but still affiliates are shut out. I had to route the affiliate revenue to family in other states (they made accounts). The whole thing is a mess and removes one of the great ways to provide free content and still generate revenue for a website creator.

    @Chip – Local Businesses compete with big box stores, just as small online merchants compete with big online merchants. It’s not a realistic comparison. Marketing is very different, and your audience is as well.

  8. Baughman says:

    I’ve loved the online sales-tax loophole for too long. It has to come crashing down in the very near future. It is too unfair to conventional retailers. I’m amazed that more people don’t exploit the ~10% benefit.

  9. hawks5999 says:

    I’ve loved the automobile for too long. It has to come crashing down in the very near future. It is too unfair to livery stables and buggy whip manufacturers. I’m not amazed at all that more people are exploiting advances in technology while older industries die.

  10. @Baughman, plenty of people in CA are still exploiting the ~10% benefit. Many consumers in California and New York already use a package forwarding address from Oregon (where there is no state sales tax) to shop tax-free online, even though their states collect sales tax on online purchases. (You just order with an Oregon address, then have your packages forwarded to your own state, tax-free). See http://bit.ly/mRILaE

  11. I have a really hard time understanding why anyone feels it’s fair for Amazon.com to skirt sales tax while the bookstore around the corner from me has to pay it. Online sales were simply not taken into account when much of the current tax code was written. As technology evolves, so too must the tax code.

    Not charging sales tax on online sales is tantamount to subsidizing an industry that already has plenty of intrinsic advantages. That makes no sense. If you believe in the free market, you should be shouting for the government to treat all forms of commerce the same, and not provide this artificial advantage to online merchants. If you live in a state where you’re charged a sales tax, you should expect to pay it no matter from whom you buy.

    Maybe this negatively affects some of you (I live in NYS, and now pay sales tax on Amazon.com purchases). That doesn’t make it wrong.

  12. A brick and mortar mom and pop only has to worry about 1 state’s tax laws. If we say that all online businesses have to collect sales taxes for every state they could sell to, that would make it near impossible to start an online store without major investment. There are tens of thousands of small online stores. Many of them have affiliate programs as a way to get sales (60% of something is better than 100% of nothing). Forcing them to follow, collect, and file taxes for every state (and country?) is unrealistic. Add to that taxes and shipping costs combined will dry up much of the online consumers.

  13. Baughman says:

    The key issue here is that Amazon is enjoying a tax break relative to local distributers only because of an arbitrary tax policy. I have mentioned nothing regarding their inherent ability to distribute goods more efficiently and produce a better customer-service experience. I hate taxes as much as the next guy, but it doesn’t much analysis of the situation to realize that this is a preferential tax treatment issue, not a “which distribution method is superior” issue. The tax law accidentally favors internet retailers, and as much as I hate to admit it, this loophole will closed within the next few years.

  14. Sharing some link love. I referenced this article on my blog this afternoon. You can check it out here: http://stitchsilly.blogspot.com/2011/07/creating-your-own-accounting-system.html

  15. My 2 cents.

    I think it should be a level playing field between internet and physical retailers regarding taxes. You need some stores to look at the items? The current game is on its way out.

    What should the states do? Make it easier for all involved. A better solution would be to setup one agency that collects tax and distributes it back to each state. Anyone that sells in the US would be required to plug into this agency.

    Words like cooperation and trust hold ideas like this back.

  16. Howard Roark says:

    Ahhh Atlas Shrugs…. So because Amazon is running a succesful business they should now be penalized to operate on the leave as B&M stores to be fair? Really folks…really? Business is not meant to be fair, the cream rises to the top…. Do you all like to buy from Amazon, do you enjoy their lower prices? Do you enjoy the convience of not having to drive everywhere to get goods? So a politician has the great idea to try and fix his mess with somebody elses good forturne and hard work. Well guess what if you want something to disappear tax it! Guess what happened Amazon will be leaving, its affliates will be leaving. If you really want to be fair change the tax code that is affecting the BM business and let the retailers that are thriving thrive.

  17. Eric Jacobson says:

    Competition is an important factor, but as someone mentioned shipping is a leveler for many products. Priority shipping starts at $5 and up which is comparable to about 7% in tax on a $70 item. Maybe if one is selling pricy stamps or light books, that wouldn’t be the case.

    If one accepts (as I do) a theory that taxes are meant to cover costs of services provided, what costs were incurred by Amazon in CA without having a physical presence? Sure, sales taxes cover all kinds of things, but that’s a much larger issue, isn’t it?

  18. This is definitely a rock and a hard place with no easy answer. I definitely sympathize with local mom and pop shops that are struggling to compete with online retailers. At the same time, a person can drive across the border to a state without sales tax and purchase items without paying any sales tax. I don’t know the answer.

  19. The point of the retail sales tax is to cover the cost of government services in your community. However, if Amazon has no physical presence in your community, why should they be expected to collect taxes for your community? If it was a federal sales tax, that would make sense–but we shouldn’t expect out-of-state retailers to collect local sales tax based on where the buyer lives (or where the item is shipped). Would you expect California retailers to assess sales tax for Minnesota if you buy something from a California and have it shipped to your home in Minnesota? I don’t think so! If local retailers want to sell items online to out-of-state residents without assessing sales tax, they are free to do so.

  20. @Chris & @MikeM

    Exactly. State by state decisions to directly tax internet retailers is impossible; there are over 10,000 different tax districts in the U.S. For instance, in Georgia, each of the 159 counties can pass special 1% taxes for school funding, transportation, etc.

    The onus cannot be on a small business that decides to step online to figure out the rules and filing processes of 10,000+ tax codes if we really want to encourage commerce and the development of new small businesses and jobs.

    Quill v. ND shows that ultimately Congress will need to get involved to help setup a national Internet sales-tax regime.

  21. Eric Jacobson said it above, I’ll repeat it:

    “If one accepts … that taxes are meant to cover costs of services provided, what costs were incurred by Amazon in CA without having a physical presence?”

    These states want sales tax for a sale that did not happen under their regulation whatsoever. Unless they want a tax for not outlawing the internet. Trolls. :P

    I sympathize with the mom and pops like anyone else, but really their place isn’t in competition with the Amazons of the world. They have become places people go for a different experience. Places that are fun to go to and look at things and shop at. Perhaps things you can’t find on Amazon. If they really wanted to set up interstate shopping, the right thing to do would be to set up their HQ in a state that has no sales tax.

  22. Saywhat says:

    The government calls this a free market place. Anyway, I buy a lot of stuff a garage sales.

  23. I think some people are missing the point “A 1992 Supreme Court decision stated that retailers that don’t have a physical presence in a state don’t have to collect sales taxes for sales to that state.” This has already been brought to the highest court’s attention and a decision on the legality has already been made. The point here is CA, like other states, is trying to get creative as possible to tax us because the government is broke.

  24. It is also fundamentally illegal for state/local politicians to impose a sales-tax upon if the point-of-sale is outside their legal jurisdiction; they often do so anyway, but there’s no shortage of common bank-robbers either… despite the law.

    Also, the out-of state sellers don’t get to even vote in the taxing state {‘Taxation without Representation’}… and do not benefit from the “local services” supposedly paid for by the sales-tax. Sellers actually pay the sales-tax– not the Buyers.

    For internet sales, if the seller is physically located outside a given American state/municipality… then the seller is not under the legal jurisdiction of that government entity — and can NOT be taxed. The point-of-sale is outside the legal tax district.

    At a more precise level, the point-of-sale is where the ‘sale transaction’ is actually conducted/recorded. The point-of-sale for internet purchases is at the seller’s own computer servers — if they are physically out-of state… they are not taxable.

    Interstate telephone/catalog sales worked that ‘tax-exempt’ way for many decades — until politicians got greedy and ignored the “Commerce Clause” in the U.S. Constitution.

  25. Why have none of the Ayn Randers proposed eliminating sales taxes for everyone? If they object to Amazon being punished for its success, why do they think brick-and-mortar stores should continue to suffer a competitive disadvantage?
    Currently such stores serve as uncompensated showrooms for online retailers. (I wonder if Amazon will have to open physical showrooms when their competition is driven out of business!)
    Amazon is currently blackmailing South Carolina and Texas, threatening to close warehouses, actual physical presences, in those states if they do not get a sales tax exemption. They are suing New York State to get the same thing. Who can blame them? They know that a level playing field is not in their interest.

  26. Brent212 says:

    The government gets to take a portion of my money when I get it, then again when I use it. Awesome. Sales tax is a joke.

  27. Michael says:

    Why does Amazon continue to help consumers evade taxes?

    The taxes are due either on the front end (sales tax) or on the back end (use tax) in nearly every state.

    Amazon is just playing a semantics game.

    Amazon needs some integrity.

  28. Michael says:

    @Matt-

    Being not “required to” doesn’t equal the same thing as not having a responsibility to do something.

    Further, where is IMDB located?

    Finally, why doesn’t California deserve this revenue?

  29. Brent,
    You should be more concerned about where your taxes are going, not how much you are being taxed, and certainly not how many times you are taxed. Taxes are necessary, not evil. Complaining about high taxes is foolish (especially since tax rates are very low). Complaining about where that money is being spent is fair game.

  30. One thing that continues to confuse me is how “other” online retailers with affiliate programs don’t seem to be under scrutiny. Amazon and Overstock have cut off their affiliate programs, but what about Adorama and B&H and hundreds of other companies that have affiliates in California? Should I be expecting more “Sorry, we’re cutting you from the program” emails soon?

  31. Kenneth

    Adorama is indeed in the process of contacting our affiliates who are based in California to advise them that the current relationships are going to need to be adjusted, as I believe B&H are also doing.

    Helen Oster
    Adorama Camera Customer Service Ambassador
    Helen@adorama.com

  32. Perhaps the best approach is to have the same flat relatively small sales tax charged by all on-line purchases sold by retailers not having physical presence in all the state. The complexity of collecting different tax rates for different states will make it nearly impossible for small retailers to comply. This should be simplified to entice compliance. I think a say 3% tax will not deter people who purchase on-line from making the purchase.

  33. howard_roark says:

    Yes lets tax all internet sales… do you really want to see all jobs end up overseas do just that. If that happens I guarantee that amazon will relocate overseas even if shipping is more expensive. Keep making it harder for business to do business and they will follow the lowest labor rate, right now China, pretty Soon India, then they will start moving down Brazil. Just wait.

  34. I’m not advocating for more taxes. I do enjoy near tax-free purchases from Amazon and other out of state Internet retailers, but I also recognize that it’s a loophole that creates unfair competition for local retailers and deprive states of needed income. I think CA nearly 10% sales tax rate (if you add all the city and county taxes) is ridiculously high. The current tax loophole benefits the more educated, savvy shoppers (you and me ) and penalizes the poorer and less educated ones and the ones that pay use taxes. However, it is impossible to require all retailers to comply with all states’ tax collection rules. A simple flat tax is easier to manage and fairer all around.

    I doubt that Amazon will move to China, India or Brazil if a small tax is collected. You sound as if these places don’t levy taxes. With long distance shipping, what will happens to its express and priority shipping programs? Doing businesses in those countries can be extremely challenging because of problems with infrastructure and/or political climate.

    Reasonable taxation is not evil. It’s the price we pay for living in a civilized society. What constitutes reasonableness is well, subjected to debate.

  35. sth_txs says:

    Lots of fuzzy thinking here. I support Amazon on this. It is pure government greed once again. No wonder businesses are fleeing from CA. And the people they have harmed would have had some extra income. I’ll be very happy if CA collapses; it could not happen to a nicer bunch of fools.

    Brick and mortar are at no disadvantage because of the sales tax. Rent costs, costs to collect payroll taxes and be a tax collector for the state, along with scores of other asinine regulations do far more damage to a physical store than some sales tax. If you really care about them, take a look federal, state, and local impediments to a physical business and its creation. Ask a business owner.

    Though I’m a TX resident, I think TX is blackmailing Amazon. The money I”ve saved on purchases has certainly contributed to my home budget’s bottom line so I can go out for a burger (pay sales tax) when I want.

  36. Howard Roark says:

    Thuy….I believe they Amazon will relocate overseas to follow the labor rate. Right now their is enough of a tax climate to allow them to grow here but keep taxing their specific business model and they will just move to a country that has the lowest labor rate regardless of tax code. The labor rate will offset any tax advantage.

    Why do states need this income? What is the state funding or misfunding that requires that much money from its citizenry. You also state that its not fair because educated and savvy people will use Amazon. Really thats your argument. Whats the definition of savvy…hello. So lets punish people for making the smart decision. Fair is not equal. I do not want to be equal with anybody, if i make more than you so be it, if I have a prettier wife than you so be it, if I can know how to use amazon and dont pay tax while you shop at walmart so be it! Lets lower everything down to the lowest common denominator to be equall, its entirely fair what Amazon is doing. If people actually looked up the definition of equal and fair they would realize they are using it wrong and really using the word equal. To me we are not equal, based on achievement, luck, and circumstance..THATS LIFE!!!

  37. One missing ingredient here –

    The Aff commission that Amazon pays to its associates is 4%-8%

    A brick and mortar business is not paying an aff commission or adding shipping costs (or covering it themselves on orders over $25)

    My local sales tax is 7% – where is the unfair advantage?

    Its a shame our legislators arent a little more savvy. Ca loses possible income tax gains very little in sales tax. If my business was still in CA, I would be forced to move and then CA would lose jobs, income tax and sales tax.

  38. Personally I think it’s all accounting hogwash and we should have both brick and mortal and online retailers should both be obligated to collect sales taxes. Remember the sales taxes intended to be paid by the buyers. When you buy are online technically you should be personally mailing a check to the state.

    The CA argument is not about competitiveness, it’s about juristiction.

    The Supreme Court ruled that states can’t force retailers to collect the tax because they have no juristiction. CA is effectively arguing they do have juristiction because Amazon has a presence via it’s affiliates. CA could more easily make the argument that each affiliate each time they create a transaction in CA, would have to then collect taxes on that transaction. If CA pursued this route they’d likely get little in terms and tax revenues, and affiliates operating in CA would likely fall.

  39. “Remember the sales taxes intended to be paid by the buyers. When you buy are online technically you should be personally mailing a check to the state.”

    While that is technically true, it is unfair to enforce it on online retailers and not mail order or brick and mortar stores. You can mail order things from out of state and not pay sales tax. You can drive across a state border to a brick and mortar store and not pay sales tax.

    And vice versa, how about California-based online retailers who are selling to customers outside of California? If every state did that, then California-based online retailers would lose revenue as well.

  40. sth_txs: If your argument is other things (rent, payroll, regulation, etc…) are create more of a business deterrent than taxes then collecting sales tax should not affect business right? However, I disagree with this. Whether to pay sales tax does affect people’s purchasing habit. This is why many people choose to order things online, myself included.

    Howard Roark: If Amazon choses to relocate oversea because of labor cost, then the issue is not sales tax. It’s a different issue altogether. As to how the states mismanage their fiscal affairs, etc…, although I agree with you, again it’s a separate issue. In regard to your being smarter than those who don’t shop online or pay use taxes. Actually, you’re not smarter, you’re just a better tax dodger. I’m not here to judge, for I myself do take advantage of the loophole. At least I’m honest about what I’m doing.

    This issue is very complex. You can’t force all retailers to collect taxes for all states because logistically this is impossible. But then again, not collecting taxes and relying on people to report and pay themselves is impractical. An earlier post suggested a central online tax collecting agency that all e-commerce companies have to plug-in. While this may work, this creates another layer of bureaucracy that would impede growth. Perhaps it would work if they can make this seamless.

    In any case, I don’t blame Amazon for doing what they did. They have to do what’s best for their business, customers, shareholders as allowed by the law. However, this issue must be and I believe will be addressed in the near future for e-commerce is huge and here to stay.

  41. Also, regarding the argument that shipping costs offset tax advantage and therefore online purchases should not be taxed, while numbers-wise this may come out to be true, logically this does not make sense. People shop online and pay for shipping because of the convenience it provides. This saves them time and money for not having to run around town to purchase the items. E-commerce companies pay for or subsidize shipping because again their business model does not involve expenses of maintaining expensive stores that allows them the margin to subsidize shipping costs. While all this make senses business wise and the model works for everyone, it is not a valid reason for justifying not paying taxes. Again, I hate paying taxes as much as anyone; however I think it’s important to recognize things for what they are.

  42. I was a CA affiliate and got terminated. But I live overseas now, so just updated my mailing address and was reinstated.

    There is an opportunity in this. I will focus advertising to CA residents to buy from Amazon through my site and avoid sales tax, yeah!

    Some call it a loophole. They have succumbed to the state indoctrination that taxes on everything are reasonable. It is pure evil.

    Just one more bad gov money grab to hurt the state even more. Not much positive on the horizon for CA.

  43. The State of California does not have a revenue problem. The people of California have a Sacramento problem.

    CA already has way too MUCH revenue. The should eliminate the sales tax altogether. It was once said that 10% taxes was tyranny, but supposedly now it is not enough!

  44. All they’ll do with “added revenue” from taxing us online is spend it on hookers & booze, like they do with any tax they collect here to “help out the economy”. WHAT a load. None of it is going to “help” California’s economy. Screw that—I’ll keep shopping at Amazon til they cave & start charging sales tax–and then I’ll switch to whoever’s left who’s not charging a sales tax. It’s all b.s. If it gets to where I have to pay any tax on anything here, I’ll just stop shopping here altogether, plant a vegetable garden, and start weaving my own clothes, because ANY amount of tax here is too much when they start whining about how “unfair” it is that everyone doesn’t charge sales tax. I’d rather see the whole state turn into a desert than bow to this garbage.

  45. 1. We already pay for high shipping costs, why should we pay a sales tax too?
    2. Walmart has been doing to small businesses for years what its claiming Amazon did to them. That is just desserts.
    3. People keep referring to mom and pop shops but the truth is those who use Amazon probably weren’t shopping at those small businesses in the first place.
    4. Online shopping is a completely different animal from brick and mortar shopping, as a result, it should be treated differently.
    5. Brick and mortar shops still have advantages over Amazon such as how fast you get an item you buy. Should the playing field be leveled for Amazon too?
    6. Trying to force Amazon to implement a sales tax isn’t going to fix the problems of these BnM stores. It will only be a bump in the road. are these businesses going to keep finding ways through the gov’t to take down online shopping when they realize why people have grown out of such business models?

    Taxing is not the answer, and the sooner Walmart and businesses like that realize that the sooner they can find their own way to compete against Amazon. I buy from the cheapest person. Heck, sometime i’ll spend a bit more at Amazon to get a preordered item the day it is released because Walmart is so unreliable (not just online but also in stocking the store).

    I lost sympathy for brick and mortar places when I saw that a book I paid $10 for on Amazon (including $4 shipping) cost $35 before you include sales tax.

    Also, as someone who relies on buses for transportation, immediately, Amazon provides the better value. I’d rather spend an extra $5 than put up with long waits with the bus and unreasonable weather with no guarantee that said product will even be at the store.

    As for mom and pop shops, well when they partnered with walmart in sc to keep amazon out, guess what happened? they won but walmart stabbed them in the back. so yeah, I don’t put much pity into those stores. they are part of the problem and in the end are no better than walmart.

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