Brown Signs Punitive Amazon Tax

(This is an updated Washington Examiner story from June 29.)

JUNE 30, 2011

By KATY GRIMES

With the California legislature having just passed a flawed budget full of accounting tricks, budget gimmicks and money grabs, one area of small business is about to be taxed right out of business — just so that the state can fill a budget hole instead of making necessary and substantive cuts.

Gov. Jerry Brown, a Democrat, just signed one of the budget trailer bills — the Amazon tax — which will tax all Internet purchases made in California and charge e-retailers a “use tax” for doing business in the state.

The “Amazon tax,” ABX1 28, was part of the budget deal, which was vetoed only 10 days ago by Brown.

And already, Amazon has notified its online affiliate businesses that the company is terminating all contracts in California.

In the face of strong evidence that this trick would most certainly put many small e-retailers and Internet affiliates out of business, legislators continued to pursue what they claimed would be a $200 million windfall of tax income. AB 155, one of the online tax bills wrapped into ABX1 28, authored by Assemblyman Charles Calderon, would change the definition of a “retailer” to include any group “that performs services in this state in connection with tangible personal property to be sold by the retailer.”

The bill states, “Qualifying services include, without limitation, the design and development of tangible personal property (merchandise) sold by the retailer, or the solicitation of sales of TPP on the retailer’s behalf. Imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon the retailer’s gross receipts from TPP sales in this state.”

Calderon even included a “complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer.”

That about covers everything a retailer does. However, the bill specifies that the use tax is also imposed on “purchasers” — the customer.

But many businesses cannot pass along additional costs to customers, particularly during a recession, when they are happy just to keep selling merchandise.

Instead, out-of-state retailers and some eBay sellers are the only potential payers of this new tax money. And while many of them will be forced to collect the sales tax for California, most others stand to lose California’s business.

Amazon and other out-of-state retailers warned that they would stop doing business in the state, forcing more than 25,000 small affiliates to close businesses in California. Most commonly, the affiliates are small, Mom and Pop operations working out of their homes.

Substantial Income Lost

This will surely result in no new “use tax” money, and the income loss from the termination of the California affiliates will be substantial.

For this reason, Performance Marketing Association executive director Rebecca Madigan opposed the bill. The PMA represents 25,000 California small-business affiliates who earn revenue by placing advertisements for online retailers on their Web sites.

Months ago, Madigan warned that affiliate business operators would be forced to move or terminate their businesses if any of the Internet tax bills were signed into law. Now, all three Internet bills, wrapped into ABX1 28, have been passed and signed by the governor.

“That’s 25,000 small businesses that will be lost to California’s already struggling economy,” said Madigan. “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.”

Former Republican state senator George Runner, a current member of the Board of Equalization, tried to warn lawmakers that if the Internet bill passed “online retailers will terminate their relationships with the nearly 25,000 affiliates currently doing business in California. That’s what they’ve already done in other states that passed such laws, except New York, for purposes of mounting a legal challenge.”

Reducing Revenue

Runner said that, while supporters claimed the state would earn an additional $150 – $200 million in tax revenue, the punitive online tax bills would cut into the $42.2 billion in sales and use tax revenue paid last year in by California businesses, by chasing the online affiliate businesses out of California forever.

The Board of Equalization reported $124 million in state income taxes paid by affiliates in 2009 — an amount which many say has increased since 2009.

Amazon, eBay and other out-of-state businesses don’t pay California sales and use taxes because they don’t get any benefits from the state. Their workers live in other states, and do not benefit from California’s schools, roads, and other state services.

The Interstate Commerce Clause of the U.S. Constitution stipulates that only the federal government can pass laws concerning commerce that crosses state borders and is a primary reason for America’s prosperity — there are no tariffs among the 50 states. As many economists have correctly observed, America is a vast, free trade country, with 310 million producers and consumers.

Charlie Hollander, a New York diamond seller and online affiliate, does business with both Amazon and eBay. Hollandar explained that the two online retailers do business a little differently.

“Amazon invoices the client directly, while eBay requires the seller to invoice and collect. And Amazon pays affiliates directly, minus a commission.” But Hollander said, Amazon deals with American sellers, while eBay has international sellers. “How are eBay sellers going to pay taxes to all of the countries, much less to all of the American states?” asked Hollander.

Other sellers are greatly concerned as well. Loren Bendel of Savings.com, a Texas native who moved to California more than 14 years ago to pursue internet opportunities warned, “If California is not careful, they will actually be creating incentives to start businesses in other states. California is no longer the center of innovation and technology and creative breeding ground. People have other choices now.”

“The true victims of ABX1 28 are California job creators, both large and small, for-profit and non-profit, who will suffer an unavoidable loss of income if they continue to do business in this state,” Runner wrote in a letter to Brown asking the governor to veto the bill.

“The answer to California’s thirst for revenues is not to make California less friendly to business. Rather, California should extend a welcome mat to cutting edge entrepreneurs and small businesses. Job creators need fair tax policies, regulatory stability and clarity from government.”

Expect to see even more businesses fleeing California for business-friendly states.