Suicidal California Amazon Tax

March 24, 2011

By JOHN SEILER

Sometimes I wonder if the politicians, special interests and most media in California have a suicide pact among themselves — with 37 million Californians forced to go along. It’s an updated version of the Jim Jones cult, in which the “Rev.” Jim Jones (actually a non-religious con man) hypnotized or forced 918 followers to drink Kool-Aid laced with cyanide at the 1978 Jonestown Massacre in Guyana.

Jones and his Peoples Temple cult followers were mostly Californians.

This year’s Kool-Aid is a proposal by the Peoples Tax Cult to tax sales on Amazon. As tax-increase cheerleader George Skelton explains today, Amazon doesn’t have to charge taxes on purchases. That gives it an advantage over Walmart, Target and other stores that operate here in bricks-and-mortar buildings.

Skelton writes:

It is a growing national problem that several recession-plagued states — New York, Illinois, Texas and Colorado, among others — have been fighting.

Federal law requires e-tailers and mail cataloguers to collect sales tax only if they have a physical presence in the state — a nexus — such as a traditional brick-and-mortar store or a warehouse.

New York found a way around the law, and so far it has survived court tests. Skinner’s bill, which on Monday cleared its first committee, is patterned after New York’s law. It would redefine physical nexus to include a dot-com’s “affiliates” — website operators that provide a link to the e-tailer — in return for a commission on sales.

Unfortunately, Skelton doesn’t note the reason Amazon and other out-of-state businesses don’t pay taxes here is that they don’t get any benefits here. Their workers live in other states, and so don’t benefit from California’s schools (ranked 49th in the nation), roads (crumbling) and other state services. So why should they pay for them?

The Interstate Commerce Clause of the U.S. Constitution stipulates that only the federal government can pass laws concerning commerce that crosses state borders. That’s a key reason for America’s prosperity the last 220 years: there are no tariffs among the 50 states. It’s a vast, free-trade area with 310 million producers and consumers.

Expanding the Tax Definition

One way some states are trying to get around this is to expand the definition of the “nexus” of business location a state. California has about 25,000 Internet “affiliates” of Amazon and other companies. These can be big stores. But commonly, they are small, Mom & Pop operations that work out of their homes.

Skelton backs AB 153, a bill by Assemblywoman Nancy Skinner, D-Oakland, that would tax affiliate sales in California. He writes that “her bill would net between $250 million and $500 million annually for the bleeding state general fund.” (Yeah — bleeding because of the immense pension burden the governor and Legislature refuse to reform.)

It’s not just Amazon that benefits from the lack of tax collection. Skelton quotes George Runner, a Republican member of the Board of Equalization (tax collectors). Runner said:

There are as many as 25,000 Internet affiliate businesses in the state that could be wiped out by this bill. The bill simply won’t work. Out-of-state retailers will cut ties with their California affiliates and continue selling to California consumers.

Runner also says that, in 2009, affiliates paid $124 million in state income taxes. It’s probably more now that the economy has recovered a little (at least outside Taxifornia).

Already, Amazon has fired its affiliates in Illinois and Colorado after those states imposed taxes similar to those in AB 153. And Amazon has threatened to do the same to New York if that state’s tax prevails in court.

Skelton contends, “Barnes & Noble, which does collect the sales tax, has offered to pick up some of the Amazon affiliates. Other online retailers could, too.”

How does he know? Does he run a small business in which the burden of changing to a new affiliate sponsor might mean the death of the business?

And how about Skinner? According to the biography on her Website, she’s spent her whole life as a Berkeley environmental activist. She doesn’t know what it’s like to be a small, Mom & Pop outfit trying to pay the family bills as the state bears down on its business with higher taxes and regulations.

Skelton also quotes a study saying the real loss to the state in lost Internet taxes is $1.7 billion. But that would include taxing all such sales, not just the affiliates affected by Skinner’s bill. And there’s no way the Republican-controlled U.S. House of Representatives is going to let that happen.

Whatever their many faults in other areas, Republicans at the national level are allergic to any new taxes. If they forget that, the Tea Party activists will remind them. And last December, even President Obama considered it prudent to extend the Bush tax cuts.

Static Thinking

Moreover, the Legislature’s own analysis of AB 153 found:

In a purely static world with full retailer compliance, BOE [Board of Eqalization] estimates increased state and local revenues of $152 million in fiscal year (FY) 2011-12 and $317  million in FY 2012-13. These estimates are based on the combination of (1) the amount of revenues currently being  collected in New York, adjusted for California’s larger economy, and (2) increased revenues associated with out-of-state retailers that sell to California consumers on eBay that would have a use tax collection obligation under this bill.

So, instead of the up to $500 million Skinner says might be collected, it might be just $152 million. And notice the key word “static.” That means the estimate assumes Amazon won’t fire its affiliates; and the affiliates won’t be hurt and many of the shut down, or move to more accommodating states.

Let’s do the math: If only $152 million is collected, but $124 million in income taxes are lost (as Runner says), then the net would be just $26 million. That’s less than $1 per Californian.

Another California Suicide Attempt

Now, here’s where the California suicide attempt comes in.

Despite its many problems, California remains the world center of Internet technology. Apple, Intel, Facebook, Google and many others dominate software and hardware from Silicon Valley.

And down in Orange County, Conexant and Broadcom dominate the crucial Internet switching systems that send “packets” of bits and bytes around the globe.

California’s policy on the Internet should be: frictionless Internet activity. The more activity on the Internet, not just in California but around the country and the world, the more people everywhere will buy Apple computers, Intel microchips, Facebook advertising, Google advertising and Conexant and Broadcom switches.

The more all those things are bought and used, the more jobs are created in California. And the more all those things are made in California, the more income, sales and property taxes will be paid by our workers and businesses.

Moreover, if Skinner’s tax goes through, that will just be the beginning of more taxes imposed on the Internet. Not just in America, but around the world.

Soon, the Internet will slow down to the crawl suffered by drivers on California’s underbuilt, clogged roads and expressways.

It’s impossible to calculate the amount of business, and tax revenue, that would be lost should the Internet get bogged down in more taxes and regulations. But California, as the epicenter of Internet innovation and evolution, would be hit as hard as Japan just was by the Tohoku earthquake, tsunami and nuclear crisis.

It would make as much sense as Detroit favoring higher gas taxes. Or Hollywood backing a new, $5 tax on movie tickets. Or George Skelton favoring a special tax on political pundits.

That is, California pushing an Internet tax would be suicidal. The state doesn’t need to drink the Kool-Aid of another tax increase, but to start making California once again a friendly place for business, jobs creation and innovation.

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  1. StevefromSacto
    StevefromSacto 24 March, 2011, 09:55

    Your overriding goal is to destroy government and privatize everything. So you are against anything that contributes to making the government fiscally sound and able to provide needed public serrvices. That’s your bottom line. And everything you post is colored by that.

    Reply this comment
  2. Tylerle13
    Tylerle13 24 March, 2011, 10:55

    Amazon is not some overnight sensation that just sprung up within the last year, this company has been around for a quite a while. If the way they do business & collect taxes is that big of a problem, then why was it not addressed years ago? Why is this issue just now coming to Congress? If this was a true problem it would have been addressed as soon as they realized it was happening instead of trying to use Amazon as an ATM now that they have run the state into the ground. Amazon operated well within the laws set forth by our government, yet they are villified for being successful. It is clear that these Legislators just dont want to make the cuts that are neccessary to make our state fiscally sound, so they form their head hunting parties and try to find any additional sources of revenue so they can continue to pay back the people who funded their campaigns.

    And steveo, no amount of money will make our government “fiscally sounds and able to provide needed public services” in the long term because every time they get any additional revenue, they just blow it on pork & fraudulent programs. Without all of the waste, corruption, & redundancy removed from our government, they will just tax & spend into insolvency. For now, they will just keep hiring media relations scumbags like Snake Oil steve maviglio in an attempt to fool the public into paying more taxes & portray successful people as villians who should be treated as ATMs for public union.

    Reply this comment
  3. Naomi Litvin
    Naomi Litvin 24 March, 2011, 23:09

    This is a good, informative article and I agree with everything except your comparison of this issue to Jim Jones and the death of over 900 people. Your writing and arguments stand on their own. You didn’t need to post a gory photo of death. It’s not too late to reprint this, sans the gore.

    Reply this comment
  4. Kent Lewandowski
    Kent Lewandowski 11 April, 2011, 10:41

    You failed to convince me how Amazon is such a great contributor to California. On the one hand you mentioned Apple, Google, etc. being in Silicon Valley, yet on the other hand you yourself acknowledged that Amazon has no physical presence in Califonia (which was your reason why Amazon should pay no state sales tax.) So how exactly is Amazon contributing to this state’s economy? Answer: it isn’t. It only takes away sales that otherwise would be made to stores that DO pay the sales tax. In fact I would wager that a significant volume of Amazon’s sales in CA happens simply because of the small price advantage it gets from getting away with paying no sales tax.
    That is exactly why Amazon needs to be taxed just like every other “Mom and Pop” store you glorify.
    And if you’re wondering why we waited so long to push this “E Fairness” bill, then you’re right it should have been done years ago. However now that CA is in fiscal crisis all loopholes need to to be revisited and CLOSED.
    Tax Amazon sales in CA – it’s the right thing!
    p.s. the new bill appears to have been renamed from AB 153 to AB 178.

    Reply this comment
  5. John Seiler
    John Seiler 11 April, 2011, 12:07

    Kent:

    1. The California tax would not affect sales by Amazon itself; that’s affected only by federal law. Only the “affiliates” would pay the tax — the Mom and Pop outfits. And if the tax is imposed, Amazon says it will just end the affiliates. So no tax would come from Amazon’s affiliates, either.

    2. You missed my point that California benefits from making use of the Internet as easy as possible: more Internet, more profits to California companies. Hampering the Internet ourselves with a complicated state sales tax on Amazon, etc., would reduce Internet use, and encourage other states and countries to do similar things. Thus hurting California Internet companies. Hurting California companies would reduce their taxable business, and so reduce the income, cap gains and other taxes they pay.

    3. Trying to grab $124 million from affiliates — and you wouldn’t get that, because many would go out of business — hardly would help solve a $25 billion budget deficit.

    4. Thank you for the update on the bill number.

    Reply this comment
  6. Sean Roberts
    Sean Roberts 28 April, 2011, 01:59

    As a progressive, I totally agree that this bill will only destroy in-state internet publishers of all sizes, who depend on affiliate ad sales for income in the same way that newspapers and broadcast TV rely on ad sales for their income. Taxing sales generated through ads on California-based websites makes as much sense as trying to tax sales made by out-of-state companies which advertise in local newspapers or on local TV stations. Of course this latter type of sales tax would never fly if only due to the lobbying clout of the print and TV media.

    Amazon and other affiliate ad networks will simply stop allowing affiliate ads on California-based content websites, killing many in-state businesses. The sales will still be made through Amazon, only no ad revenue will be paid to California webmasters. The state will lose that income tax revenue, while the websites will likely go out of business.

    As a website owner, I know the ins and outs of the business. Faced with the loss of all my advertisers, my sites would be forced to move out of state or close. Almost every other California based professional web publisher will face this same problem. How will this possibly end up in a net gain of any sort for the state treasury? It won’t.

    This is a law conceived by incompetent and/or corrupt legislators who make no attempt to grasp the intricacies of how web advertising works. Just the fact that Barnes and Noble is mentioned as a “replacement” for Amazon ads shows just how little these legislators understand the web publishing industry. Only a very small percentage of Amazon affiliate ads promote BOOKS these days. Instead, these ads promote every other product under the sun. As a result, Barnes and Noble would be unable to pick up 99% of the ad revenue that would be lost if Amazon and other affiliate ad networks (like Shareasale and Commission Junction) were to dump California websites, as they have promised to do in the event this bill passes.

    Sure there needs to be sales tax equity, but his is an issue that needs to be addressed at the Federal level. Walmart is the main force lobbying for this bill in CA and other states. They could care less about the havoc such poorly conceived legislation will wreck – their sole intent is to wage war on Amazon.

    Reply this comment
  7. HalloweenBlogs
    HalloweenBlogs 7 May, 2011, 17:14

    I can speak from personal experience on this issue, because I’m one of those small fry affiliates desperately trying to scratch out a living from Amazon’s affiliate program (and others). I was laid off in 2009, haven’t been able to find a new job since, and have no realistic expectation that I will find a new one any time soon, given California has the 2nd highest unemployment rate in the nation. I’ve been working every day, often 15 hour days, creating blog pages to try to get to the point where I can at least cover my monthly expenses. At this point, affiliate marketing is my only realistic hope of keeping off the welfare rolls and out of food banks. If any of these bills go into law, Amazon, Overstock, and other affiliate programs will dump me, and then I don’t know what I will do. The rich affiliates will move out of state, taking their jobs, personal income, etc. with them, I don’t have that option.

    I can tell you from personal experience, switching over to new vendors would require re-doing the months worth of work I’ve already done. I would get ZERO future income from hundreds or even thousands of hours worth of work I’ve already done, and switching everything over would prevent me from doing hundreds of hours worth of work that I could do as I end up having to spend that time re-doing work I’ve already done. Anyone who thinks you can just flick a switch and change everything over doesn’t understand how affiliate marketing works.

    As for Barnes & Nobles offer to pick up some of the dumped affiliates, note the word “some”. The beauty of Amazon’s affiliate program is that anyone, anyone, with a website, no matter what their traffic, no matter if they have no prior affiliate experience, no matter how small their website, can join the Amazon Associates Program and start in affiliate marketing. You don’t have to have a fully completed website, you don’t have to have a minimum traffic level, you aren’t scrutinized by some affiliate manager, you can just join and start working. It doesn’t matter how small you are, how poorly you perform in the beginning, you can still join, participate, and work towards bigger and more profitable times. That’s a large part of WHY amazon became as big as they did, their open door policy towards all affiliate marketers.

    Not so with Barnes & Noble. I’m sure they’ll be glad to scoop up the top performers, well, the ones who don’t relocate out of state, that is, but they won’t be interested in the small fry. I applied to their affiliate program and was rejected, and I’m sure I’d be rejected today too. They’re far less attractive than Amazon in any event, Amazon has a better site, better prices, better range of products (its not just books, folks) and I’m sure better conversion rates. There’s a reason why Amazon is the biggest online retailer.

    If these bills pass in California, I’ll essentially be killed as an affiliate marketer, unless I can get an out of state friend let me come and live on their couch. California still won’t get any sales tax from Amazon, Overstock, etc., the rich affiliates will take their jobs and their income out of the state, and I’ll either be forced into going onto welfare and begging my way out of the state so I don’t lose thousands of hours invested into my affiliate sites. That’s the reality.

    Reply this comment

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