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VegSource position on Amazon.com - California sales tax initiative

Jeff Nelson, VegSource Founder | 09/05/11

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Recently, VegSource.com co-owner Sabrina Nelson was interviewed by the New York Times regarding the California law which attempts to force out-of-state online retailers, such as Amazon.com, to collect and pay sales tax for sales to California residents.  The full New York Times article can be read here

As described below, the NY Times article is not completely accurate. 

Sabrina was interviewed extensively last week by a NY Times reporter, and one sentence of her interview was published.  The reporter also characterized Sabrina's reaction to the new law as “full of rage.”  This is a colorful exaggeration.  Below we detail where the article misleads, as well as our position on the new sales tax law.

For well over a decade, we were affiliates of Amazon.com.  This meant when we linked to some book or product on Amazon, if a guest clicked on that link and made a purchase, we earned a small commission on that sale.  Over time as the site has increased in popularity, the amount of commissions we have made increased, and helped to support the site – though our Amazon.com commission was only a small part of our business.  Unlike the New York Times, we do not charge any fee to view content on our website; our advertising, such as what we did with Amazon links, keeps us online – as well as the many veg websites we give free hosting to.

California, like most states, is feeling a tremendous financial pinch.  In 1978, California passed an initiative called Proposition 13,  the “taxpayer revolt,” which became part of the California Constitution.  Prop 13 decreased property taxes in California, especially for corporations, and mandated that taxes could not be raised by the state legislature without a 2/3rds majority, rather than a simple majority.  When the economy went into the tank and many states were facing dramatic shortfalls, California has been particularly vulnerable because it is virtually impossible for our Legislature to raise any new revenues, based on Proposition 13.

The subtitle of the New York Times article states: “To avoid paying tens of millions of dollars, Amazon.com is seeking a voter referendum on whether online retailers should pay sales taxes.”

This is false.  Currently Amazon is not required to collect and pay dollars for California sales tax, tens of millions or otherwise.  The law passed by the California Legislature which Amazon seeks to have overturned does not require Amazon to pay any sales taxes -- only to do so if it restarts it's Affiliate program in California, which is currently terminated.

What happened here is that the California state legislature, needing desperately to help raise revenues, saw the possibility of forcing out-of-state corporations, which sell into California, to collect and pay them sales taxes, as though they were a company operating inside of California.  No company outside of California, has to collect and forward to the state of California any sales tax.  Many mail order companies, websites and other businesses have for decades sold in to California, and are not required to charge any sales taxes.  
The reason California (or any state) cannot require a company in another state to collect and pay sales tax is due to the Commerce Clause of the US Constitution.  The Commerce Clause gives the federal government the exclusive right to regulate commerce between the states, see: http://en.wikipedia.org/wiki/Commerce_Clause

So California had to come up with a way to claim that websites operating out of other states did in fact have a physical presence in California, which would trigger a requirement of that business to collect and pay California sales tax.  The California Legislature decided to assert in the new legislation that any person in California who had a website which posted a link to Amazon, for which Amazon paid a commission on sales to that person, that this person constituted Amazon's physical presence in California.  And if Amazon had a physical presence in California, it was now subject to California law and would be required to collect California sales tax.

So because the family that owns VegSource.com lives in Los Angeles, and because we had an affiliate account with Amazon whereby they would pay us a commission if someone bought something on Amazon after clicking on one of our Amazon ads, Amazon was therefore physically doing business in California, out of our home.

That is what this new law states. If you are in California and place an advertisement for Amazon or another website and get paid a commission, that website is now physically located in California and subject to California law.

And in response to the new law, Amazon simply cancelled all of their California affiliates the day the law went into effect – as they promised they would do.  Thus, Amazon could not be considered to be “doing business” in California, out of our home, and since they don't have a physical presence in California, they aren't subject to California sales tax law.

The result of all that's happened to date on this was that we lost the income we were earning from Amazon, and the State of California not only has been unable to have Amazon collect and forward sales tax, but it has lost whatever state income tax would have been paid by California affiliates of Amazon, who no longer can earn those commissions.

We support Amazon in cutting off its California affiliates – and Amazon is not the only business which cut off their affiliates – there are dozens of internet companies who have dumped all their California affiliates as a result of the new law.

Amazon set out to have the law overturned, using the Referendum process, so that it can reinstate its California affiliates. The state Legislature is manuvering to try to block Amazon, though Amazon has already obtained the 500,000 voter signatures needed to put the measure on the ballot.

This new Amazon sales tax law has been sold as an attempt to raise revenues for the state, as well as to “level the playing field” between online out-of-state business and bricks & mortar companies doing business in California.  The measure has been heavily supported by big box stores in California like Walmart, Target, Macy's and Best Buy, as well as the California Retailers Association, who backed the legislation.

Interestingly, the big box stores do not pay state sales taxes themselves for their online operations when they sell into states where they do not have a physical presence.  So it would seem their interest is not in “leveling the playing field” in those other states where they themselves may have an advantage over local businesses.  

Over time, business changes.  There used to be many small booksellers.  Then the big chains like Borders and Barnes & Noble came along, and they drove many small bookstores out of business.  Then came the internet, iTunes and the e-book, and suddenly Borders – like the smaller bookstores it put out business – was unable to complete, and went away.
 
It is not surprising that Target, Walmart and Best Buy would seek to use political connections in the California Legislature and other states in order to try to take out their online competition.  

Amazon.com is not opposed to collecting and paying state sales taxes, nor are we at Vegsource – we do pay sales tax on all California purchases of our own products.  

However, making a law to redefine what it means for a company to be physically in California in order to force a company to collect a tax the state is otherwise not legally able to collect – shows just how sketchy California's position is.  It is highly doubtful the Supreme Court will allow the California State Legislature to redefine what constitutes interstate commerce – when this is clearly the purview of the federal government.

Think about it: if the state of Alabama enacted a law stating a company in California had to collect and pay Alabama sales tax because someone in Alabama put up a link to the California company on their website – this is the same thing California is trying to do to companies working out of all 49 other states.

Rather than trying to find real solutions to the revenue problems facing California – which probably should include revisiting the California Constitution, which hogties the Legislature's ability to raise revenues – California is chasing phantom Amazon money, money which they are not entitled to collect per the US Constitution.  Not only are they never going to be able to collect that money, they have ended up hurting tens of thousands of California families who are no longer earning money they depended on from their Amazon and other affiliate relationships.  

As the owners of VegSource, we want to say that we are not anti-tax.  We are not speaking from a knee jerk reaction toward taxes, or from a merely self-interested position of what hits our pocketbook.  We do agree with Amazon cutting off our affiliate account under the circumstances, even though that was not in our personal financial interest.  We simply disagree with the time and energy and money being wasted by the California Legislature pursuing this law, which essentially redefines language so that an out-of-state company suddenly becomes a California company.  This is a law which the Supreme Court will ultimately strike -- but in any case, since Amazon and other companies simply dumped their California affiliates in response to the law, the law will never create a dime of revenue.

You can watch the video below of Amazon.com CEO Jeff Bezos explaining their position on sales tax: why they are in favor of a national sales tax policy, which would actually create a level playing field; and why they are dropping their affiliates rather than pay sales tax in states where they have no other physical presence.

 



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