Amazon and California Reach Surprising Compromise on Sales Tax
Gov. Jerry Brown signs Amazon compromise legislation.
A long-running contentious and caustic battle over sales taxes between online retailer Amazon.com and the state of California came to a quick and unexpected resolution last month. Among those lined up against Amazon, the world's largest bookseller, in this epic struggle was the American Booksellers Association, a trade organization of independent, bricks and mortar bookstores. Considering the vehemence with which Amazon had fought a requirement that they collect sales taxes, it is surprising how suddenly they backed down, in return for a one-year delay.
California, like many states, has long sought to require out-of-state internet and catalogue retailers to collect sales taxes on sales made to customers within their state. However, a decades-old Supreme Court decision has prevented the imposition of a tax-collecting requirement on out-of-state retailers unless that retailer has some sort of “nexus” with the state. “Nexus” has generally been thought of as a physical presence within the state, such as a store, office or warehouse. While chain stores, such as Wal-Mart and Target, have to collect sales taxes even on their internet sales because they have physical stores in most if not all states, internet-only retailers like Amazon do not. As long as they avoid placing warehouses and the like in a state, they do not have to collect the local sales tax.
This has long been a major bone of contention for two parties – the states, who lose enormous amounts of tax money, and local retailers, who believe they are at a competitive disadvantage since they must collect sales tax. The issue has simmered below the surface for decades, but recent state and local budget crises around the nation have led states to aggressively pursue this lost revenue. Technically, local residents are supposed to pay sales tax anyway. There are laws on the books in every state that require residents to self-assess and pay a “use tax,” an amount equivalent to the sales tax, when they purchase from an out-of-state retailer that does not collect their local tax. The reality is, however, that very few people ever pay this tax, something in the 1% range.
Earlier this year, California began to ramp up the pressure on Amazon. It passed a bill stating that local “affiliates,” people with websites that direct traffic to Amazon.com, would be considered agents of Amazon, thereby creating “nexus” with the state. Amazon cried foul and immediately severed its relations with its California affiliates. It then threatened to go over the head of the legislature and appeal directly to the voters, through a voter initiative, to repeal the legislation. Meanwhile, Amazon also held out a carrot to California. It promised to build several warehouses in the state and hire thousands of workers if California would lay off on the tax collecting requirement. This approach had worked earlier in Tennessee. California was not biting. California wants its sales tax revenue, and was determined to make life miserable for Amazon unless it complied.
And so, Amazon blinked. California is a huge market for Amazon, apparently far and away its largest. Amazon did not want to lose its affiliates. Perhaps even more importantly, Amazon wants to get physical with the state. The offer of warehouses and jobs was not merely a ploy to get out of collecting sales taxes. Local warehouses enable the company to significantly reduce shipping costs, and provide the quicker delivery service needed to compete with local stores for impatient customers. Amazon felt a need to be in California, and perhaps also thought it saw the writing on the wall in terms of its ability to forever avoid collecting sales taxes. So, for a one-year reprieve, Amazon agreed to begin collecting sales taxes in California in 2012. Additionally, it agreed to cancel its plan to place a referendum repealing the law on the ballot.
That reprieve may appear somewhat costly for California. It is estimated the state will lose $200 million in sales tax collections over the next year, with municipalities losing a similarly large sum. However, the reality is that without an agreement, Amazon was unlikely to collect the tax anyway, so California may not have lost anything, and faced still more lost revenue a year from now if the case dragged on.
Once California and Amazon reached an understanding, the state legislature repealed the legislation that set in place the expanded definition of “nexus” designed to ensnare Amazon. Governor Jerry Brown enthusiastically signed the bill. The Governor pronounced, “This landmark legislation not only levels the playing field between online retailers and California’s brick-and-mortar businesses, it will also create tens of thousands of jobs and inject hundreds of millions of dollars back into critical services like education and public safety in future years.” Anyone who has followed California's recent financial issues realizes the state sorely needs both.
Meanwhile, Amazon echoed its support for the compromise. In a written statement, Amazon Vice President of Global Policy Paul Misener stated, “This bipartisan, win-win legislation will allow Amazon to bring thousands of jobs and hundreds of millions of investment dollars to California, and welcome back to work tens of thousands of California-based advertising affiliates." It is anticipated Amazon will be welcoming back its California affiliates almost immediately.
Amazon and California Reach Surprising Compromise on Sales Tax
Amazon's Seattle headquarters (courtesy Amazon website).
The new law, that canceled the expanded definition of “nexus” enacted earlier this year, reinstates that definition a year from now. That new definition is reinstated as of September 15, 2012, the date Amazon has agreed to voluntarily begin collecting sales taxes, unless the federal government enacts a law authorizing states to collect sales tax from out-of-state vendors by July 31, 2012. In that case, sales tax collection could be delayed to as late as January 1, 2013, but no later. While this may reopen the issue in a year with other internet vendors, Amazon has committed itself to begin collecting sales taxes by then, so the largest online retailer will no longer pose an issue for California.
In the meantime, Amazon will be pushing for the aforementioned federal solution. There is a proposal on the floor for something called the “Main Street Fairness Act.” When the Supreme Court said that the states could not constitutionally require out-of-state retailers to collect their sales taxes, it implied that the federal government could use its authority to impose such a solution. The “Main Street Fairness Act” would allow the states, provided they meet certain requirements designed to ease the burden of collecting such taxes, to impose collecting requirements on internet retailers. California's interest in this piece of legislation may not be quite as enthusiastic, as it has obtained fully what it wants from Amazon and it is not clear whether a federal statute would be quite as favorable. Still, it would open up the opportunity to collect sales taxes from out-of-state merchants other than Amazon. Amazon has expressed strong support for legislation like the “Main Street Fairness Act” as it would simplify the process of collecting state sales taxes, and the firm may have concluded that it is inevitable that one day they will have to do so anyway. Simpler is better.
Illinois Senator Dick Durbin, the primary proponent of the “Main Street Fairness Act,” welcomed the California-Amazon compromise as a step in the right direction, while noting his belief that it is not fair to make Amazon have to deal with up to 50 different taxing authorities individually. In other words, in his view this settlement provides added reason for enacting legislation like the “Main Street Fairness Act.” It remains to be seen whether Congress, which has declined to act on this issue for decades, will now feel compelled to move. While technically this is not a tax increase, since people are supposed to be paying an equivalent use tax already, and the “Main Street Fairness Act” now has a proponent in Amazon, joining the states, the ABA and other retailers, many consumers are still likely to see this as a tax increase. Tax increases are rarely popular, especially ones like this that will affect just about everyone who purchases something over the internet. In a year when incumbents all across the nation can expect to be feeling the heat from voters, they may be ill-inclined to do anything that might anger them more, regardless of how they might personally feel about this issue.