Deep in the heart of taxes: Will the new law be effective?

The fight over the Amazon sales tax is just beginning.

The new era has begun: Out-of-state retailers are now forced to make their customers pay the California sales tax for purchases made on the Internet. Before this new state law, online companies without a physical presence in the state could voluntarily decide whether to charge the tax.

According to the Board of Equalization, that gave retailers like Amazon an unfair advantage in prices over instate businesses like Wal-Mart, Best Buy and Target, who have always had to make their customers pay the sales tax.

But now, with the new law in effect, the debate remains regarding how effective it will actually be in bringing back revenue to the state. According to the governor’s office, the expected revenue from the tax is $200 million. However, opponents to the bill question whether it will generate any money at all.

David Duran, the communications and legislative director for George Runner, a former state senator and who now sits on the Board of Equalization, doesn’t believe this law will actually accomplish the goals behind it.

“The bill doesn’t actually bring about fairness or level the playing field,” he said. He noted that Amazon will use any method available to avoid the tax, as the company did when it severed its relationships with some 24,000 members of its Amazon Associates Program who reside in California, thereby eliminating its physical presence in the state.

According to Duran, concerns over Amazon’s reaction to the law go back to its beginnings when Assemblymember Nancy Skinner introduced it in January.

These worries became reality when Amazon sent a letter to its California affiliates after the law passed saying that in order to continue doing business with Amazon, these affiliates would have to move out of state.

However, this move by Amazon may not be enough for the company to avoid paying the sales tax.

Anita Gore, a spokeswoman for the Board of Equalization, said the new law actually has a few different requirements that will determine whether an online retailer has to pay the tax. She said the section about California affiliates is only one portion of a three-prong law.

The second provision of the law says that if a company has subsidiaries in the state, even those that have nothing to do with the online sales, such as a research and development company, the company will still be required to make customers pay the sales tax. Amazon, for instance, has its Kindle design and development based in California.

Gore said that the third provision of the law says that the online tax is imposed wherever warranted under the constitution or federal law.

“Using these three prongs together, they will be deemed to have nexus under the provision of this law,” Gore said.

But the question of the legality of law remains because it counters a 1992 Supreme Court decision that said sellers only had to collect the sales tax if they had an actual physical presence in the state. Anything else, the Court said, would mean states would be regulating interstate commerce, something the Constitution strictly prohibits.
In terms of the future, a legal challenge remains possible.

Duran believes that opposition to this law will most likely lead to litigation. He said the most legally problematic part of the law is the provision concerning subsidiary companies, which he deemed legally questionable.

“Most of the time when states have tried to get creative and collect sales tax from out of state sellers, courts have slapped them,” Duran said, citing the 1992 Quill Supreme Court decision. This decision struck down an attempt by North Dakota to impose a use tax on the Quill Corporation, an office supply retailer, which had no physical presence in the state.

“It’s pretty clear that states’ authority in this area is limited. Most likely it’s unconstitutional. But just because it’s unconstitutional it doesn’t stop the immediate loss of job and revenue,” he said. “This has a long past.”

The issue seems to have an unclear future as well.

Lenny Goldberg, the executive director of the California Tax Reform Association, believes that this law is only the beginning when it comes to further necessary government regulation of Internet retailers.

“Companies are skirting the law,” he said, “but may be subject to enforcement.”

According to Goldberg, this law is the first step in combating “the number of games that Internet retailers use.” While he believes that the law will lead to some revenue, Goldberg thinks another important result of this law is that it will force the federal government to act.

“There’s a solution at the federal level,” he said. “The U.S. Supremes said Congress had to solve this problem and said that they’re not going to hear these cases on the ground that this is an issue Congress needs to deal with.”

However, in the meantime, he thinks that Amazon will have to start charging its customers the sales tax anyway, since the lawsuit would take about three years, and if the company lost the case it would owe hundreds of millions in back tax.

“They take a massive risk if they sue and not collect,” Goldberg said.

Amazon has also given hints that it’s not done fighting back either.

As the retailer said in an email to California-based associates, “If this situation is rectified, [we] would very much welcome the opportunity to re-open our Associates Program to California residents. We are continuing to work on alternative ways to help California residents monetize their websites.”