Amazon pushes California toward referendum on online sales tax

Amazon.com is preparing to fire back after California passed a law that requires the online retailer to collect sales tax from state residents. And in typical California fashion, they're taking their grievance straight to the people.

The state attorney general's office on July 18 approved Amazon's petition for a statewide referendum on the law. If Amazon can collect 500,000 signatures by Sept. 27, voters will be able to decide next year whether they want to pay sales taxes for online purchases.

California is the seventh state to try to get around a 1992 US Supreme Court ruling holding that sellers can't be forced to collect sales taxes unless they have a physical presence in the state. At stake is desperately needed tax revenue for states that are broke, the competitive advantage of the world’s largest online retailer, and the cost of everything consumers buy online.

California is trying raise an estimated $317 million annually from sales taxes collected by online retailers. A University of Tennessee study says uncollected sales taxes from online sales could be as high as $11.4 billion nationally and $1.9 billion in California.

But Amazon is refusing to cooperate. The California bill was founded in part on the fact that Amazon has thousands of affiliates in the state – small retailers that sell goods under the Amazon banner and get a commission from Amazon for every sale. As a result of the new law, which went into effect July 1, Seattle-based Amazon has severed ties with its California affiliates.

In a July 1 letter to those affiliates, Amazon wrote: The bill is "supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, tax revenue.”

The sales-tax issue is important to Amazon and other online retailers since it is at the core of their competitive advantage over stores like Wal-Mart or Best Buy.

“Amazon has a lot at stake here [with their] huge competitive advantage in not having to collect sales taxes,” says Stephen Liedtka, associate professor of accounting at Villanova University in Pennsylvania. “There are lots of reasons readers should care [and] voters need to understand these issues to the extent that their states" need revenue.

Amazon has already filed a legal challenge against a similar law in New York.

Analysts say Amazon will spend a lot of money on the California campaign because its national reputation is at stake.

“There are benefits to Amazon even if the referendum and other efforts fail,” says Mr. Liedtka. “This is because Amazon is sending a message to every state that efforts to raise taxes will be met with expensive, drawn out public battles and outcry from a subset of voters."

He adds that the financial stress on California's erstwhile Amazon affiliates could also have an impact. "Even if it is only short term, if eliminating affiliates in California causes tax revenue to drop slightly, Amazon and advocates for no sales tax will have a powerful argument in their arsenal," Liedtka says. "Politicians who are secure in their jobs have incentive to avoid controversial actions.”

Antitax critics in California are already piling on.

"Californians are losing jobs and income as a result of the so-called ‘Amazon Tax,’ " says George Runner, who was elected to the state's sales-tax authority, the board of equalization, last year. "It should come as no surprise that impacted California business owners would seek its repeal."

He says his staff has identified more than three dozen online sellers that have terminated their affiliate programs, costing jobs and income for California – “losses that could have been easily avoided had the governor and Legislature exercised a little common sense," he adds.

If states want laws like California's to survive and spread, they need to work together, says Liedtka.

“If every state enacted such a measure – or if there was a national Internet sales tax, which some have called for – Amazon won't be able to avoid sales taxes by simply relocating affiliates domestically,” he says.

But he says such cooperation has rarely happened because the leadership in many states believes that sales taxes hurt businesses. Also, there is growing potential for non-Internet-sales-tax states to benefit at other states' expense.