On-Line Retailers Are Tax Targets

JAN. 21, 2011

By KATY GRIMES

In a move designed to be a revenue booster for California, an online sales tax bill has been revived again. But many small online affiliate business owners are saying that if the bill is passed into law, they are making plans to move out of the state for good.

Assemblywoman Nancy Skinner, D-Berkeley, author of AB153, said her bill “would provide ‘e-fairness,’ by assuring that out-of-state online retailers doing business in California pay sales tax, the way brick and mortar businesses pay sales tax.” Skinner said the sales tax revenue would go to supporting teachers, firefighters and police.

The fight is primarily between the online sales company Amazon.com and states that charge sales tax. The conflict comes from a 1967 U.S. Supreme Court decision, reaffirmed in 1992, that said businesses without an actual physical presence in a state are not required to collect state sales tax. The court ruled that forcing firms to navigate the nation’s many state and local tax codes and laws would pose an unconstitutional barrier to interstate commerce.

More than 20,000 California small businesses affiliates claim they stand to lose their business relationships with out-of-state online retailers such as Amazon.com and Overstock.com, or have all of their California business sales charged a sales tax rendering them non-competitive with states that do not charge sales tax.

For this reason, Performance Marketing Association Executive Director Rebecca Madigan said her association opposes Skinner’s bill. PMA represents 25,000 California small-business affiliates who earn revenue by placing advertisements for online retailers on their Web sites. Madigan said they will be forced to move or terminate their businesses if AB153 is signed into law. “That’s 25,000 small businesses that will be lost to California’s already struggling economy,” said Madigan. The affiliate businesses include small bloggers, up to big Web sites like ebates.com.

“The bill states that if someone has advertisements on California Web sites, then there is a nexus in California, and the business needs to pay taxes on all revenue collected in the state,” Madigan said.

In 2009, these small business affiliates paid more than $124 million in state income tax to California, according to the PMA. Madigan said that if Skinner’s bill passes, the businesses will either leave the state, or terminate operations. “The state loses either way.”

“The affiliate businesses don’t have to end all of their business relationships since many do business with retailers other than Amazon.com and Overstock.com, that already pay sales tax in the state, as Target and Barnes & Noble do,” said Liz Mooney, communications director for Skinner. And Mooney said that businesses with physical locations in California already pay sales tax on their online sales.

Madigan said that this is the third time Skinner has introduced this bill, but it has been defeated each time. “I keep hearing from our affiliates that even if the bill is killed again, they may move anyway. They wonder why they should invest in California, or continue to take the risk, when all this bill does is set up merchants to terminate their businesses.”

Mooney said that when the same law was passed in New York, Amazon.com did not terminate affiliate relationships. However, when the law was passed in Rhode Island and North Carolina, Amazon.com cut its relationship with its affiliates.

Mooney added that the Seattle online retailer Amazon.com was created specifically to avoid the state sales tax issue. “However, Amazon.com does pay sales tax in Washington state where they are headquartered.”

Board of Equalization Member George Runner also expressed concern for the business affiliates. “This ill-conceived measure would backfire by killing jobs and making our state’s budget problem worse. It would be just plain stupid to pass a law aimed at increasing state revenues that does the exact opposite, especially when this same law is currently tied up in federal court and is likely unconstitutional,” Runner said.

Gene De Felice, the vice president and general counsel of Barnes & Noble spoke at the press conference in support of the bill. It’s not fair,” said De Felice. “In 2010, we paid $45 million in sales tax to the state of California. The money goes back to local residents, and pays for teachers, police and firefighters.” De Felice said the out-of-state online sales are operating using a loophole that puts all retailers at a serious competitive disadvantage. Since February 2006, Barnes & Noble has been collecting sales tax on online purchases made through its website. Barnes and Noble has more than 100 stores in California, and a large technical center in Palo Alto.

“This is not a new tax, it’s a collection issue,” said Bill Dombrowski, president of the California Retailers Association. “Stores become showrooms where people browse, then they buy items online.” Dombrowski said services in the state suffer because revenues that could help reduce the state’s deficit, help schools, fix potholes, and fund financially-strapped police and fire departments, is going out-of-state.

However, Runner said that California doesn’t have a revenue problem. “It’s time to stop treating symptoms and start treating the disease.  California’s core problem is that people aren’t working. Californians need jobs, not more laws and taxes. Too often, revenue solutions by lawmakers often attack job solutions,” Runner said.

Currently, New York, Rhode Island and North Carolina have the online sales tax law. According to Madigan, each of the states lost online business because of it. “The state will collect zero on tax revenue, since the advertising income will disappear in California,” Madigan said.

“I find it ironic that Amazon.com doesn’t have to do anything other than have the sales tax charged at the point of sale,” said Mooney. “We think the bill actually supports California businesses, and helps create jobs.”