Amazon Makes Jerry Brown an Offer He Can’t Refuse – Yet He Might

By :: September 2nd, 2011

After threats and tough talk for most of the summer, Amazon seems to be changing tactics in its battle against collecting sales tax on purchases by Californians. For months, the firm has been bankrolling a ballot initiative to reverse a new state law requiring online retailers to collect the levy. Wednesday, Godfather-like, Amazon made Governor Jerry Brown an offer it thought he couldn’t refuse: Amazon would open new distribution centers in California in exchange for a two-year delay in the law. Yesterday, the governor said he thinks not.  He hasn’t made a final decision but he’s signaling no.  I’m sure that Amazon and its supporters will now blame Brown for costing the state 7,000 new jobs. 

 Here’s the back story: In June, Brown mandated collection of the tax.  Sales tax collections by out-of-state sellers are governed by a legal principle called “nexus.” In effect, if a business has a physical presence in a state, it must collect taxes. Amazon promptly cut ties with 10,000 California business affiliates to erase any physical presence. It refused to collect the tax and funded the campaign to repeal the law through the ballot box.  This isn’t a new fight. We blogged about it last March, when states started proposing laws to collect internet sales tax, and back in 2009, when New York first raised the issue of Amazon paying taxes due to the presence of affiliates within the state. 

Amazon offered to bring 7,000 distribution center jobs to California to avoid a ballot-box fight in exchange for a two-year moratorium on the tax. Want to guess how long the jobs stay once the freeze ends?  Are 7,000 jobs worth the $200 million-a-year in sales taxes the state figures it will collect (plus another $100 million for local governments)?   And would they ask for another delay or blame Brown for sacrificing these jobs? Of course, offering to set up distribution sites has already worked for Amazon in South Carolina and Tennessee.

Meanwhile, the repeal effort rolls on.   Amazon has donated over $5 million to collect signatures, and many of the paid signature gatherers were set up in front of its big box store competitors. The referendum, which would repeal the law, requires 505,000 signatures of registered voters to make it onto the ballot. Given California’s record on tax votes, chances are the repeal will go through.

Amazon is bound and determined to avoid collecting sales tax to keep a price advantage over its competitors, even though in doing so it is effectively encouraging its buyers to break the law.  Other e-tailers seem to have no problem calculating and collecting the tax.

What does this mean for California’s budget?  It obviously doesn’t help. State revenues already appear to be coming in below projected levels, which means more budget cuts later this fall. But that might be a blog for another day.

Meanwhile, Amazon’s move may signal the end of my love affair with my Kindle.  As convenient as shopping at Amazon is, I’m going to buy things from sites that charge their customers sales tax. While I did pay use taxes in California (where you report it on your income tax return) I haven’t figured out how to do the same in DC (my current residence). Amazon’s refusal to collect taxes encourages customers to avoid the taxes they owe. I’ll stop feeding my Kindle because, in the end, I think a customer boycott may be the only way to get Amazon  to behave.

14Comments

  1. Paul Arkay  ::  2:41 pm on September 2nd, 2011:

    Yeah, AT&T tried to bribe the government with promises of new jobs in exchange for the approval of its merger with T-Mobile. I wonder if Amazon and AT&T are using the same government relations firm?

  2. Michael Bindner  ::  3:08 pm on September 2nd, 2011:

    Yet another reason to shift to a location based VAT and VAT-like net business receipts tax to replace retail sales and corporate income taxes. Such gaming then becomes impossible, since it is more expense to move than comply.

  3. CJ  ::  11:38 pm on September 2nd, 2011:

    “Meanwhile, Amazon’s move may signal the end of my love affair with my Kindle.”

    You said it. There’s a reason I went with the Nook. =)

  4. AMTbuff  ::  1:47 pm on September 3rd, 2011:

    When sales tax collection begins on all Internet sales, will that expense to buyers be counted in any official measure of inflation? Or will the additional out of pocket cost be ignored because everyone was already obligated to pay even though they didn’t? I’m guessing the latter, but does anyone here know?

  5. Keith  ::  3:18 pm on September 3rd, 2011:

    Out of curiosity, if this were to pass does that mean that every e-tailer in the country will now have to keep track of and adhere to every sales taxing authority in the country, every township, city, county and state that collects sales taxes? And thus legally responsible for reporting to them. That might effectively crush all web commerce as we know it currently. The vast majority of e-tailors are small businesses.

  6. George  ::  3:55 pm on September 3rd, 2011:

    Collecting this tax is something any catalog retailer has no problem with.
    Land’sEnd just looks at your ZIP and the readily avail database sets the tax rate, and the means to pay it to CA and other states.
    If you’re large enough (like Amazon) you can automate even the filing of the state sales tax returns.

  7. George  ::  3:57 pm on September 3rd, 2011:

    But you are both missing that Kindle books (at least in CA) are NOT subject to sales tax.
    Thank the legislature for exempting digital products long before e-commerce became so prevalent.

  8. George  ::  4:03 pm on September 3rd, 2011:

    As for small businesses, I’ve set up 10- and 40-state sales tax collection for small businesses. Most Sales/OE software supports this — Peachtree, Adagio, ACCPAC, Great plains.
    Businesses know they have to comply. The fiction of ‘killing e-commerce’ has got to die, when Amazon is now bigger than Land’sEnd in sales. Land’sEnd has no problem collecting my CA sales tax.

  9. Art  ::  4:15 pm on September 3rd, 2011:

    In DC try FR-329 to report the use tax. Kudos by the way for doing that!
    Contrary to popular belief, “internet retailers” do not operate in some interstellar out of reach places where sales tax does not apply. How’s Amazon different from the excellent example of Land’s End really? No store? So is sales tax a penalty on silly stores who needlessly maintain a place of face to face customer contact? Assume the extreme for a minute where no one pays sales tax. Where is the state going to get funds from? Higher property or income or whatever taxes. Can we just move on to solving the larger issues at play?

  10. Ross M  ::  5:46 pm on September 3rd, 2011:

    You analysis is good except for the last paragraph. Amazon does NOT break the law. The company does not have nexus in these state and therefore is NOT required to collect sales tax. In fact, Amazon (to my knowledge) does NOT have nexus in DC! If you want to pay “use tax” (and you are probably just about the only person who reports this) then by all means do so, as it is really up the customers in these states – NOT Amazon (or any other online retailer without nexus).

  11. Vivian Darkbloom  ::  5:00 am on September 4th, 2011:

    That’s a good question, but I think your focus assumes that in putting CPI statistics together, the BLS incudes internet sales (e.g. from Amazon) in their basket of goods in the first place. Everything I have read suggests that they continue to rely on local “retail sales”, that is, sales off the shelf at local retail outlets. If I am correct, then it does not matter one way or the other. And, if I am correct, then the BLS is somewhat overstating CPI by not including internet sales in its statistics because I’m assuming that the internet price is generally lower than the off-the-shelf price (with or without sales tax). There may have been an historical political and practical issue here: when the internet first emerged and Amazon was formed, few people had access to internet and fewer people actually shopped there (particularly the elderly). That, of course, has changed dramatically. This suggests to me that its time to rethink how CPI is measured.

    What the BLS does say is that CPI includes taxes directly related to the purchase of goods, such as sales taxes. Even if internet sales are now included in the “basket” I don’t know how the BLS could already include sales taxes on internet sales into the CPI because the prices at point of internet purchase do not include sales tax and it would be awfully difficult for BLS to impute the appropriate rate—which state’s rate would you rely on? The tax is not reflected in the “sticker price”. Obviously, it would also be somewhat self-serving “not” to include such putative taxes in CPI—to do so would have a not insignificant effect on the federal budget (indexation of the tax code, social security, etc). On the other hand, it would be self-serving to include internet sales to begin with, and it’s not clear to me that is currently done.

    So, the question is twofold:

    1. Does the BLS include internet sales at all in the CPI;
    2. If they do, are sales taxes included?

    My guess is the answer to 1) is “no¨and *if* the answer to 1) is “yes¨, those taxes are not included.

  12. Ralph H  ::  8:20 am on September 5th, 2011:

    Don’t hold your breath on a customer boycott. For everyon like you there are at leas a thousande like me who rejoice in the savings and who would NEVER pay a use tax. Besides, I like the Kindle!

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  14. Taxing Amazon: Good For States And Good For Me | thecommerciallaws.info  ::  2:22 pm on April 4th, 2012:

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