Current Events and Commentary

California Takes Another Try At An “Amazon Tax”

February 2011
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Because of state budget woes, sales tax collection is getting additional attention. Let's begin by clearing up a popular misconception; for a majority of states, all Internet sales are already taxed. For example, in California:

  1. If you buy from a site like or, the site charges sales tax and pays it to California.
  2. If you buy from a site like, no sales tax is collected at the time of purchase, but the purchaser is required to report the sale on his California income tax form and pay use tax on it. California-based businesses are also required to specifically report their purchases of otherwise non-taxed transactions, and pay the related use tax at the same rate as would occur had the sale been made in California.

Because compliance is higher at the point of sale, California would rather have its sales tax collected at the point of sale (i.e., number 1 above). The difference between which option is applicable involves court decisions on interstate commerce that date back to the early days of mail-order catalogs. For a state to have jurisdiction over a company's transactions, the company must have a “business nexus” in that state. For, the business nexus is hard to miss; it is their gargantuan warehouse stores. But, what about They have no stores. For Dell, it is the service people providing on-site repairs to their servers and business computers. The point is that it doesn't take much to count as a business nexus, so if a company as large as Amazon does not have a nexus, it is because they have been very careful to avoid it.

The reason to avoid the nexus arises because of the possibility frequency that Californians do not comply with the use tax that is already on the books. With noncompliance, there is a de-facto price advantage. That de-facto price advantage results in a double-whammy to California. First, the impression that certain internet sales are tax-free puts local merchants and California-based online retailers at a disadvantage. Second, nobody looking to create or expand an online business would ever put even a tiny part of it in California or any other state where a large percentage of their customers are located.

On January 18, 2011, two bills were introduced in the California Assembly. One tries to address the issue from the nexus standpoint, while the second considers use tax compliance. Previous attempts at an “Amazon Tax” were vetoed by Governor Schwarzenegger. With a different governor and the state looking for every possible dollar to close the budget gap, the results may be different this year.

California Assembly Bill 153 is a Affiliate Nexus bill which follows the pattern of a so far successful 2008 attempt by New York to say that even one in-state participant in a program that pays to refer customers (such as Amazon's Affiliate program) constitutes a nexus. Several other states, most recently Illinois, passed similar laws. In vetoing previous attempts at this legislation, then-Governor Schwarzenegger cited concerns of job losses among California participants in Affiliate programs. In response to the New York action, did cancel its Affiliate program in New York but did not.

California Assembly Bill 155 takes an approach included in a recent Colorado law. It says that online retailers that do not collect sales tax must send to California residents each year a statement regarding how much they spent and how much use tax is due on their California income tax. In addition, the firms must send a comparable report to the state. Presumably the state would cross-check their report to individual tax returns for enforcement purposes.

Each of these proposals has shortcomings. Not all Internet merchants have an affiliate program, so the Affiliate Nexus program will still not encompass all transactions. The reporting law raises privacy concerns since it would require retailers to report individual sales and purchases to an extent never before expected.

Assuming this taxation is desired, a better approach is available, but requires federal action. Court rulings maintain that since the constitution gives the federal government the right to regulate interstate commerce, sales tax collection can occur across state lines only if Congress passes a law permitting it. Action on that front has been moving slowly for several years.

Over forty states, including California, participated in creating the Streamlined Sales and Use Tax Agreement (SSUTA). The Main Street Fairness Act is being promoted by Massachusetts Congressman William Delahunt. It would allow states that conformed their laws to the SSUTA to be able to collect sales taxes from all other conforming states. Currently 20 states conformed their laws to SSUTA. It is likely that many more would do so if it meant simple and effective collection of sales taxes on e-commerce.

Resellers are understandably concerned about the complexity of having to register, report, and track differences between laws in countless jurisdictions throughout the nation. The SSUTA and Main Street Fairness Act minimizes these problems by (i) requiring the tax regulations to be normalized, (ii) requiring only one registration (i.e., registration reciprocity for a reseller's permit) for all jurisdictions, and (iii) allowing the use of service providers to aggregate and distribute all of the taxes and manage the reporting.

The Main Street Fairness Act stalled in committee in the prior Congress. It is questionable whether the current Congress will touch anything resembling a tax, even if it is only enabling a voluntary action on the part of the states.

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