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Sunday, February 21, 2010

"Amazon" tax bill back in action in California

Despite veto by Governor Schwarzenegger in July 2009 (AB 178) and the reality that it won't improve tax collections (and may make them worse - more on this later), legislators are reconsidering the so-called "Amazon" tax bill (ABX8 8). The Senate passed it on February 18 (23-15) and the Assembly is to vote on it on February 22, 2010.

Basically, the goal is to get some remote vendors to collect the sales and use tax rather relying on California consumers to self-assess and pay the use tax they owe. Certainly, collection is easier and more likely when the state collects from several thousands of vendors rather than from millions of consumers. But, the bill is unlikely to work. Vendors, such as Amazon and Overstock, will most likely follow practices in Rhode Island and North Carolina that enacted similar bills, and just cancel their contracts with California affiliates so they are no longer subject to the bill. So, the state will have to continue to rely on consumers paying their use tax. Time and money would have been lost that could have been devoted to implementing better use tax collection strategies. Also, the California affiliates do earn income from the web links on their webpages which they hopefully are paying income taxes on. That income tax revenue will be lost with the cancellation of the affiliate contracts.

A few observations:
  1. When Governor Schwarzenegger vetoed the version of AB 178 that reached his desk in July 2009, he said he didn't want to impose more taxes on Californians. This illustrates the very weak understanding of the "use tax" even among elected officials. These "Amazon tax" bills are NOT tax increases!!! All they attempt to do is to get more vendors to collect sales/use tax from customers rather than relying on mostly non-compliance consumers to self-assess their use tax.
  2. There are better approaches. I've written about this several times: (1) 12/24/09 post on ways to collect the use tax without the "Amazon bill" approach; (2) Problems with the Amazon approach, and (3) "Challenges in Collecting the Use Tax."
  3. I'm amazed at the amount of money some affiliates (the ones with the links on their websites to Amazon, Overstock and other vendors who pay a commission) appear to be making. I came across one today where the person said such affiliate income represented about 90% of his family's income! Hopefully income and business license taxes are being paid.
  4. Many affiliates seem to be organized and use that structure to fight "Amazon bills." For example, the Performance Marketing Association is calling upon affiliates to contact California legislators to voice their opposition to ABX8 8. They call it the "ad tax." I think that is interesting. That is also a big question. Are these affiliates merely advertising, which seems to be the intent because they really have no authority from Amazon or other online vendors to sell products (they are not sales agents). But some of these pages do seem to be encouraging people to buy certain items (specific books) and they earn commissions from Amazon. Is that solicitation? If it is, an "Amazon bill" isn't needed as these affiliates would already be giving Amazon and other vendors a physical presence in the state. But, the contracts are likely worded as such to make it difficult to prove solicitation.
  5. I'd like to see the affiliates organize to help promote better use tax compliance. Perhaps if they did, legislators would not keep coming back to the "Amazon bill" approach. Why don't California-based affiliates remind Californians (and perhaps all customers) of the use tax and put a link on their website to the CA Board of Equalization information on paying use tax - "Your Use Tax Responsibility." This could be a great public service, particularly for non-profits, such as PTAs and home and school clubs who would indirectly benefit from more people paying their use tax (the state would have more money for K-12). Better yet, why don't the states join together to create a single website with the use tax information for every state and make it easier for affiliates (and others) to put that public service information link on their website.

Unfortunately, the "Amazon bill" (currently ABX8 8) won't solve use tax collection or budget shortfall problems in California. There are better approaches to both addressing the budget shortfall and moving California's tax system into the 21st century. I recently had an opportunity to suggest some ideas to the Assembly Revenue & Taxation Committee - see link to 1/13/10 testimony here.

2 comments:

Stefan said...

Maybe naive - but wouldn't it just be the easiest to move sales tax collection from state level to government level? This way all the headaches for inter-state tax issues and use-tax collection would go away if there is a federal sales tax that applies to anyone. It will make it easier for businesses (just imagine - no more dealing with the 1,000 of different tax rates in cali) and the government would get more tax income as it doesn't lose out on non-reported use-tax sales. It's a win for business, government as well as customers (less headache for them, no need anymore to file use-tax purchases) ?!

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