Should Online Businesses Pay California Sales Tax?
Monday, August 15, 2011
Amazon.com is pushing to overturn a California law requiring the firm to collect sales tax on internet purchases from California consumers.
Should internet retailers pay sales tax in California? A group that supports health and human services in California has called for a one-day boycott today of Amazon.com. They are asking Californians not to buy from the online retailer, because Amazon is not complying with a new state mandate on Sales tax. California recently passed a law requiring Amazon to collect sales tax - Amazon is fighting the law and is collecting signatures to put the measure on the ballot. Local business leaders say this gives Amazon an advantage over traditional businesses and they want to level the playing field.
Dr. Steve Gill, Assistant Professor of Accountacy, SDSU College of Business Administration
CAVANAUGH: A group that supports health in human services in California has called for a boycott of Amazon.com. They're asking Californians not to buy from the online retailer because Amazon is not complying with a new state man date on sales tack. Of California recently passed a law requiring Amazon to collect sales tax. Amazon is fighting the law. So far it has not remitted any sales tax to the state, and Amazon is collecting signatures to put the measure on the ballot. Joining me to break down this issue is my guest, doctor Steven Gill, assistant professor of accountancy at SDSU who specializes in tax law. Welcome to the program.
GILL: Thank you Maureen. Good afternoon.
CAVANAUGH: Now, why did the California legislature pass a law requiring the Amazon to collect sales tax?
GILL: The Amazon tax as it's frequently known is really a series of steps that states have been taking nationally to try to garner more sales tax revenue. And you can really consider it an expansion of the existing tax law to try to sweep additional sales into the umbrella that we can apply sales tax to, collect, and of course the state generates additional revenue.
CAVANAUGH: Bring in more money.
GILL: Absolutely. Amazon tax is intended to be a revenue generating tax.
CAVANAUGH: I've heard millions of dollars a year. Hundreds of millions of dollars a year.
GILL: That's right. Yeah, California was expecting about three hundred million per year from the Amazon tax. And about two hundred million of that was supposed to come directly from Amazon itself.
CAVANAUGH: I know that a lot of people feel very passionately about this issue. And if you're listening and would like to tell us, if you think Amazon Internet sales should be taxed, give us a call at 1-888-895-5727. Or comment on twitter at KPBS midday. Now, doctor Gill, does this law apply to all online sales then, not just Amazon?
GILL: Well, specifically it was directed toward big, big E-commerce sellers like Amazon. So for example, if a mom and pop store here in California is selling a small amount or small dollar amount of goods, nationally, the Amazon tax is not intended to affect them and almost certainly will not. It was clearly geared toward sales of a much larger volume. And I believe the minimum is 10,000 a year.
CAVANAUGH: Now, one of the things Amazon.com has said is that it's not physically in the state. So how can California go after this company for taxes?
GILL: That's right. Amazon doesn't have what's called a physical presence. And will in tax lingo, we refer to this magic connection between a company and the state as nexus. Nexus just means that a state and in fact apply a tax against whatever out of state business might be operating with some connection to the state at all. Typically and historically, we think of nexus being defined as a physical presence, which is do you have employees? Do you have property? What do you have in the state that creates that connection? Amazon would allege, hey, we have no employees, no bricks and mortar stores in California. How can you possibly extend this magical nexus to us? And the definition of nexus has a long tradition of really avoiding anything above the physical presence, though it is not without exception. There are a handful of states that have gone beyond that.
CAVANAUGH: California has now gone beyond that. And how are they explaining that?
CAVANAUGH: Where do they find the nexus?
GILL: The nexus is found through the Amazon partners. So for example, Amazon itself has no bricks and mortar here. But they have over 10,000 partners here in California that do in fact probably have bricks and mortar stores or some store front or address and employees. And so what California and the Amazon tax law, which again, California is not the first to try to pass, it creates that connection through the partners. So Amazon's reaction was, well, if it's the partners that are creating this magical nexus, then guess what? We're going to drop all our partners.
CAVANAUGH: Which they say they've done.
CAVANAUGH: So that puts the whole thing in legal limbo at this point.
GILL: To some extent, it is in legal limbo. California is not the 50. If we go back about a decade, New York was the first state to really pass an Amazon tax. And Amazon has fought that in New York. Now, they kept their New York partners. But what they did is they've taken it to court in New York. And I think they're really hoping for this issue to play itself out inside the New York and then ultimately the U.S. Supreme Court.
CAVANAUGH: Now, a lot of people who have stores here in California, brick and mortar stores say it's about time that Amazon.com is going to have to pay some sales tax, because it level it is the fleeing field and it's not fair that they should have to pay sales tax, and big giants like Amazon doesn't pay a thing.
GILL: They absolutely have a point. I think it's safe to say that a bricks and mortar store is playing in a market where they are collecting and remitting sales tax just as any other instate organization would do. But that's not without some criticism. The first would be, well, look, this idea of not having a physical presence has existed for decades. Originally think of it as mailorder catalog sales and telephone sales. Now, of course, people use the Internet for commerce considerably more than we ever used those other channels. And so the states have been slow, I think, to adapt existing tax rules to try to capture a large channel that represents a lot of commerce now in the states. The second thing is a typical bricks and mortar store does have an advantage over an Internet store. And that is you can walk down to the store, you can try the clothes on. You can touch and feel the items that they sell. And I've never heard claim from any of the Internet sellers, boy, that's really unfair. That's an unfair playing field. You guys get to have your customers actually try your stuff on.
CAVANAUGH: One of the things that people do say is that people who have brick and mortar stores here are using the roads and the highways and the electrical grid inside the state, and therefore they should be paying sales tax to maintain that. Whereas somebody who is not in the state is not burdening the state in that way. Is that also a valid argument?
GILL: I think that's a reasonable argument. Although when we think about taxes, we try to avoid the direct connection between what's collected and what is goes for. But it's safe to say that anyone who's being taxed should be deriving some value. And in fact our U.S. constitution guarantees that to be the case. If you're deriving no value, then it's probably not constitutional for that tax to be applied. The definition of no value is clearly a slippery slope to go down, however.
CAVANAUGH: I'm speaking with doctor Steven Gill. And we are talking about the issue of Amazon.com recently becoming the subject of a new state mandate on sales tax in California. Amazon is fighting that with a petition drive to get the measure on the ballot. And today, health and human services advocates in California called for a boycott of Amazon.com. And doctor Gill, I want to ask you about the two sides of that coin. Do you think Amazon is going to be able to success with this petition drive?
GILL: Whether they succeed with it or not is hymn a matter of timing. It seems clear -- again, California was the fourteenth state to try to pas an Amazon tax. Amazon successfully pulled their partner programs in every other state except New York. What we end up with is really a waiting game. Clearly, Amazon would like for this to play its way out in the Court system, not have to go to court in a number of jurisdictions. However, I think that the notion of a boycott is also with merit. The reality is here's a large company that is selling lots and lots of goods to citizens of the State of California for which no sales tax is being collected. And it's safe to say that there is some degree of unfairness that really can be associated with that. I think it's important for everyone to remember that with every sales tax also comes a use tax. And in fact, buyers who purchase items off Amazon.com here in the State of California are still 100% liable to pay their use tax on those items when no sales tax is paid. So really, forcing Amazon to collect and remit is really just a considerably easier way for the State of California to try to get their hands on that sales tax that really is due anyway, legally, under any law, previous or post to the Amazon tax.
CAVANAUGH: We have a discussion about that news tax in the news room today. It opened a few eyes. Keith is calling from Shelter Island. Welcome to midday.
NEW SPEAKER: The speaker just mentioned -- my comment is that the use tax, we all when we research something, we are liable to pay the tax. And whether we allow the store to collect that tax or pay it ourselves, it's the same thing. It's just a different process. And I believe that anything that is purchased to be used in California, no matter how it's purchased, should be subject to sales tax just like everything else you buy in a store down the street.
CAVANAUGH: Well, Keith, thank you very much for the call. Let's go to the idea of mailorder and telephone sales because does this show us the way toward an answer toward checking taxes from online retailers?
GILL: Not really. Mailorder and catalog escaped similar criticism because they're just smaller volume players in what has burgeoned into a huge sales field for lots and lots of companies. And in fact, a lot of bricks and mortar stores early on in the E-commerce maturity life line participated in this same sort of Amazon process, where they created subsidiaries that sold goods over the Internet, didn't charge sales tax, what happened was consumer demand really forced a shift for them, which is when you bought something from a local retailer, but from their online subsidiary, and you didn't like it, there was a strong desire on the part of the consumer to return that to the store. And so what happened is stores finally broke down and said, yes, we will accept returns. The second they accepted those return, of course, nexus was triggered, that magical term, and suddenly they're all subject to the same sales tax rules. And so Amazon by default is really trying to avoid this issue of creating nexus with states. And for good reason. Imagine being able to offer anywhere from a 5, 6, 7, or 8 and 3 quarters% discount on your goods that another store can't offer. And then you throw in the magical free shipping. Right?
GILL: Which probably isn't free, but that's beside the point. And some seem to have a real advantage. And so I can see -- the caller makes a good point, which is we have to figure out a way to charge sales tax. And it's probably not a legitimate plan to just avoid it all together. However, it is clear that the way tax law is written today, and this goes beyond the State of California, that opportunity does exist. And action by the federal government has seen tepid response for the most part. I think we're stuck with what we have right now for the time being. California makes an interesting choice. They -- with the wave of a pen can try to enforce the Amazon tax law. Unofficial they laid their cards on the table, Amazon calls their bluff, and the State of California ends up with nothing. It's possible that maybe we ought to be thinking of other ways to try and collect the U.S. tax. Most consumers aren't aware of it. But if they were like the previous caller was, then hopefully they're doing their part for the state.
CAVANAUGH: It sounds from what you're saying that the whole explosion of Internet sales, that local tax law has not kept up with what has actually been the fact for a number of years now, that these retailers are doing a tremendous, tremendous volume of sales.
GILL: That's right. The sales tax laws and largely the income tax laws for that matter were built when goods were put on a truck, a train, a boat, a plane, and shipped were some. And they were tangible and you could touch them. The notion that we have a system that can handle the delivery of a software package over the Internet from a server in who knows where, it's just well beyond the scope of the tax laws that are currently on the books. And the legislators in California and federally and the other states face a real challenge here because as quickly as we can write something, it's that quick that there's a response in the technology changes. And wee advanced beyond it. In principle, we haven't resolved the issue from a legal perspective. Attempts to expand the nexus like the Amazon law, and there are other for examples, are almost crude attempts to try to do that. And they're legitimate tries. And I would laud states for trying to get additional revenue in what is clearly a difficult economic time. But we really need to come up in principle with a better solution to this problem.
CAVANAUGH: And another bottom line you've told us here is you're going to pay tax one way or the other.
GILL: You got it! Unfortunately what we have is a enforcement situation where the vast majority of California and residents do not pay their use tax. Maybe it's a simple matter of trying to attack that vehicle process. Maybe educating consumers, somehow heightening their awareness of this use tax so that we don't have to go after an Amazon and kind of half hearted legislative method.
CAVANAUGH: I've been speaking with doctor Steve Gill, assistant professor of accountancy at UCSD, thank you so much.
GILL: Thank you for having me.
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