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Thursday, July 28, 2011

"Amazon Tax" is a Bad Idea

Just in case you needed a reminder of how bad taxes are in California, the Golden State came in at a pathetic 45th among the 50 states and District of Columbia on the Small Business & Entrepreneurship Council's "Business Tax Index 2011," which ranks the states according to 18 different tax measures.

California's poor tax climate got worse when Governor Jerry Brown signed an "Amazon tax" into law in late June, with the tax taking effect on July 1. Brown reportedly called it a "common-sense idea." In reality, it is anything but common sense.

Amazon taxes force out-of-state retailers to collect sales taxes on purchases from in-state entities. The U.S. Supreme Court, however, in its 1992 Quill decision, made clear that a company must have a substantive, physical presence, or nexus (such as a store or warehouse), in a state before that state can require the firm to collect sales taxes. The online retailer has no such physical presence in California. California, and other states with Amazon taxes, are trying to get around this obstacle by claiming that out-of-state retailers that have contracts with "affiliates," that is, independent people and businesses within the state who post a link to the out-of-state business on their website and get a commission from any resulting sales, constitute nexus, and therefore state sales taxes must be collected.

This is anything but a true nexus, and when this issue finally gets to the U.S. Supreme Court, these Amazon taxes should get struck down. But in the meantime, politicians greedy for more revenue will grab it where they can - the heck with the Constitution, and oh yes, the heck with their state's taxpayers and economy.

California is projected that the state and localities will rake in some $317 million from this new tax. However, as is always the case with tax increases, revenue realities rarely live up to revenue expectations. As the Christian Science Monitor recently reported: "In North Carolina and Rhode Island, tax revenues actually decreased after similar laws were enacted, according to the Tax Foundation in Washington."

Why would that be the case? Consider a few reactions to Amazon taxes:

• The Los Angeles Times reported: "Amazon and online retailer Inc. told thousands of California Internet marketing affiliates that they will stop paying commissions for referrals of so-called click-through customers. That's because the new requirement applies only to online sellers based out of state that have some connection to California, such as workers, warehouses or offices here. Both Amazon in Seattle and Overstock in Salt Lake City have told affiliates that they would have to move to another state if they wanted to continue earning commissions for referring customers... Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out."

• The Christian Science Monitor noted: "‘We're going to have to leave the state,' says Keith Posehn, who operates a website with his wife in San Diego... Mr. Posehn is one of at least 25,000 local affiliates affected by the new law. In 2008, he and his wife created - a website that helps clients develop online advertising campaigns. Until now, when his business referred a customer to an online retailer like Amazon or - and the customer made a purchase there - he was paid a commission. But now the online retailers are cutting off such payments, in a bid to erase their connections to California. Posehn says that 35 percent of his business is evaporating without the commissions. Looking for a state that is friendlier to tech-firm start-ups, Posehn says his next stop is Washington, Texas, or Utah. ‘We can either stay here and remain a target for a state that is hostile to the core of its own economy, or go to a state that is more supportive and open to tech and small business,' he says."

• Writing in Forbes magazine, Steve Forbes puts the issue this way: "That California, where modern high-tech industry was born, should wage war against Internet-based entities is bizarre. It demonstrates the madness of its political class. California faces a budget shortfall of $10 billion. This new tax might collect $200 million from Amazon and others. That's hardly a drop in the bucket. More fundamentally, it will force Amazon to sever its relationships with thousands of its affiliates. This new tax law will hurt other online retailers and their affiliates, which will damage the state economy by considerably more than that $200 million."

But is there some hope in California?

Well, a movement is under way to gather signatures in order to put a referendum on the ballot that would kill the state's new Amazon tax. The petition drive is being led from the website.

The effort is summed up: "The More Jobs Not Taxes committee has been formed to oppose the recent sales tax law passed by the Legislature that would hurt small businesses, kill jobs and undermine chances for any economic recovery in California. At a time when unemployment is over 11% in California, we need to be creating more jobs and fostering economic growth, not passing tax legislation that undermines small businesses."

That's right on target. While high-tech is so important to the California economy, the state's elected officials take the industry for granted, as is clearly illustrated by the Amazon tax, as well as a wide array of other taxes and regulations. If the voters say no to this misguided, anti-entrepreneur, anti-small business tax, will the politicians finally start listening?


Raymond J. Keating serves as chief economist for the Small Business & Entrepreneurship Council

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