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Wednesday, March 9, 2011

More on California AB 153 - so-called "Amazon law"

The San Jose Mercury News has an editorial in today's paper supporting AB 153, saying it "closes the loophole on Internet sales taxes." ("California should end online sales tax break" 3/9/11) It goes on to say that AB 153 would generate revenue that "could save the jobs of thousands of law enforcement officers and teachers."

This is not correct!

Consider:
  1. Very little revenue would be generated: Legislative analysis of AB 153 indicates an uncertain revenue estimate of $152 million in FY 2011-12 and $317 in FY 2012-13. The analysis notes that these estimates drop to $114 million and $234 million, respectively, should Amazon do as it has said it would do and end its relationships with its California affiliates (see Business Week article, 3/2/11). The figures go down further if other Internet vendors, such as Overstock.com, do the same. The Board of Equalization bill analysis (1/18/11) explains that the revenue estimate drops even further if eBay sellers who become subject to sales tax collection in California stop selling on eBay.
  2. Income tax revenues drop slightly under AB 153: The AB 153 analysis (3/3/11) notes that "the termination of affiliate programs would have an adverse impact on state employment, which would lead to lower income tax revenues." Termination of the relationships also means that California affiliates have less income and thus pay less California income taxes.
  3. AB 153 is not the same as the New York law of 2008: AB 153 sponsor Assemblymember Skinner (Bloomberg video, 3/2/11) and others have said they are not convinced Amazon will cancel its relationships with California affiliates because they didn't do that when New York first enacted this type of legislation in 2008. However, in the two other states that copied New York - Rhode Island and North Carolina, Amazon canceled the relationships making itself not subject to the revised law. And Amazon has told lawmakers it would do the same in California. I don't know why Amazon did not cancel its relationships in New York, but I'll offer two possible theories. First, Amazon just didn't think of it or thought it might be bad PR. Second, and here is where AB 153 differs from the New York legislation, the NY legislation gave amnesty to those who started collecting, AB 153 does not. (Here is a summary of this from the NY tax agency (page 11) - "Part OO-1 also includes a limited amnesty, under which a seller that is a vendor only by virtue of this bill (and that meets certain other conditions) that registers as a sales tax vendor and commences collecting tax by June 1, 2008, will not be liable for past due tax.")
  4. We all still owe use tax: If AB 153 were enacted and Amazon and other vendors cancel their relationships with California affiliates to avoid collecting California sales tax, consumers still must track and self-report and pay their use tax because AB 153 does not (and constitutionally can not) require all out-of-state sellers to collect California sales tax. And, even if no one cancels an affiliate arrangement, there will still be Internet and catalog sales to California consumers by sellers who are not subject to AB 153 meaning that the customers must still pay their use tax.
  5. The problem (and the solution) is us: There is a line on Forms 540-2EZ, 540A and 540 for "use tax." If you purchased taxable goods but were not charged sales tax, keep record of that transaction. When preparing your return, total up those purchases, multiple the total by the sales tax rate in your county and put that number of the 540 use tax line. Until Congress acts to fix this situation, this is how (using the Mercury News angle) we save the jobs of thousands of law enforcement officers and teachers. Yes, the recordkeeping can be a challenge. So, let's encourage legislators to pass a bill allowing us the option of using a table to compute use tax based on income level as is done in New York and a few other states).
  6. Use tax is not the only sales tax problem in California: The Mercury News editorial notes that sales tax revenues are down in California due to the recession and Internet sales. But, there is also another bigger reason. California's sales tax is out-of-date. It taxes the goods of the 20th century (tangible ones) and not those of the 21st century (digital ones). A sales tax should apply to all personal consumption with limited exemptions (such as perhaps for food and medicine as is done in California). But today, we consume a lot more digital goods (such as music and books) and personal services, than we did in the 1930s when the use tax was created. California needs to broaden and modernize its sales tax base. That would bring in far more revenue than AB 153 will. And that can be done while even lowering our sales tax rate which is above the 6% median rate of all state sales tax rates.

We need to solve California's real tax problems in ways that will work. Time spent on flawed AB 153 distracts from time needed to work with Congress and other states to really solve the problem, and distracts from the bigger issue of the need to modernize our sales tax base and lower the rate - a rate that is too high, which hurts low-income individuals and the state's ability to create high-paying jobs.

Further reading:

5 comments:

nctaxpro said...

Very nicely written. I see no reason why Assemblyman Skinner would expect Amazon to act any differently in California than they did here in North Carolina.

This isn't really about the revenue, in my opinion; it's more about states trying to send a message to Amazon et. al that they can't expect to hide from the long arm of the tax collector forever. The public in general supports it because it's a superficially attractive argument - make the big dogs pay - and the alternative puts the burden on the back on the individual purchaser who would like nothing more than to avoid any personal responsibility for their own actions.

Anonymous said...

The more California imposes taxes the more business will decline in California. This is not the answer. Money gained this way will only drive tax payers out of California. It is already happening, check the 2010 census. California wastes money, billions every year plain and simple.

Tim Kelly said...

I agree with your opinion that it’s time to get down to business and work with Congress and other States (such as the stream line sales tax project) to resolve this issue and level the playing field.
Another form of distraction from the matter at hand is the continued pursuit of the definition of “nexus” when States take foreign (out of state) taxpayers to court. The Supreme courts decision in Quill suggests that the physical presence requirement should be restricted to sales and use tax. But what about other taxes? Recently, I read about a case involving the Washington Department of Revenue’s assessment on Lamtec, which was upheld by the Washington Supreme Court, (Lamtec Corp v. Washington Department of Revenue, Wash., No 83579-9 January 20,2011) . Lamtec is a Pennsylvania based company that deployed its sales reps to Washington a few times a year to provide information and answer questions about Lamtec products. No selling was involved and Lamtec does not have any other presence in the State. Washington imposes a business and occupation tax for the privilege of engaging in business activity. The court ruled that this activity was enough to justify the physical presence requirement and went on to say it didn’t matter if the salesmen were employees or independent representatives.
Defining these issues through the Court system leads to increased uncertainty, added complexity and impacts neutrality and economic growth and equity.
So I agree, rather then spend resources to define these issues (in this case via the court system) States need to get together with Congress to get them resolved.

* http://www.cfo.com/article.cfm/14557143

Tim Kelly said...

I agree with your opinion that it’s time to get down to business and work with Congress and other States (such as the stream line sales tax project) to resolve this issue and level the playing field.
Another form of distraction from the matter at hand is the continued pursuit of the definition of “nexus” when States take foreign (out of state) taxpayers to court. The Supreme courts decision in Quill suggests that the physical presence requirement should be restricted to sales and use tax. But what about other taxes? Recently, I read about a case involving the Washington Department of Revenue’s assessment on Lamtec, which was upheld by the Washington Supreme Court, (Lamtec Corp v. Washington Department of Revenue, Wash., No 83579-9 January 20,2011) . Lamtec is a Pennsylvania based company that deployed its sales reps to Washington a few times a year to provide information and answer questions about Lamtec products. No selling was involved and Lamtec does not have any other presence in the State. Washington imposes a business and occupation tax for the privilege of engaging in business activity. The court ruled that this activity was enough to justify the physical presence requirement and went on to say it didn’t matter if the salesmen were employees or independent representatives.
Defining these issues through the Court system leads to increased uncertainty, added complexity and impacts neutrality and economic growth and equity.
So I agree, rather then spend resources to define these issues (in this case via the court system) States need to get together with Congress to get them resolved.

* http://www.cfo.com/article.cfm/14557143

Robert Walraven said...

There is a simple solution to the sales tax problem that has no impact on small businesses, forces Amazon to collect taxes in all states, and gets the tax authorities their money: have the credit card companies automatically include the tax on all orders. The credit card companies would then deal with paying all the thousands of tax authorities across the country. To make it worth their effort the credit card companies could keep a small percentage of the taxes collected.