Your eyes on California Government

SEE UPDATES, BELOW

SEPT. 9, 2011

By JOHN SEILER

A pending compromise with Amazon.com on taxes still would hit California small businesses. The online sales giant is working with leaders in the California Legislature to postpone a new state sales tax applied to the “affiliates” of Amazon and other out-of-state retailers until September 2012.

By then, Amazon and the legislators supposedly expect that the U.S. Congress will enact uniform interstate sales taxes laws covering all businesses. Currently, each state sets its own laws. If no national law is in place, then Amazon would agree to pay sales taxes in California, not just for affiliate sales, but for all sales. In the meantime, it has dropped its campaign to file an initiative that would let voters overturn the tax increase.

The current problem especially affects “affiliates.” These commonly are small businesses, although some are large. They sell products on their Web sites. For example, a book review site might link to Amazon’s offering of a particular book. Amazon, not the affiliate, then sends out the book to the buyer. But the affiliate makes a commission off the sale.

The California budget passed in late June included a tax increase, ABX1-28, that applied the state sales tax to such sales by California affiliates. Amazon, and many other companies that sell goods online, then fired their California affiliates to avoid paying the tax.

The reason is that, if Amazon began collecting that tax for the affiliates, Amazon itself would be considered to have a “nexus” in California. A “nexus” is a physical location, such as a bricks-and-mortar store. Currently, Amazon has no such stores, in particular after it fired its affiliates.

The compromise, if the full Legislature approves it later today and Gov. Jerry Brown signs it into law, apparently would solve the dilemma for Amazon and others.

What About the Affiliates?

The problem is that the compromise, assuming it happens, may not be good for those 25,000 affiliates that were slammed by ABX1-28. “I’m really concerned that the affiliate nexus part is repealed,” Rebecca Madigan told me; she’s the executive director of the Performance Marketing Association, a group of affiliates. After ABX1-28 was imposed, she said, “more than 800 out-of-state online retailers stopped working with California affiliates.”

This is important because, although Amazon is the elephant in the legislative chamber, these other online retailers also play a major role in the national and California economies. “We want to make sure that these companies can reinstate their affiliates, too,” she added.

And California affiliates have been hit hard, especially the small Mom and Pop operations that made a living from online affiliate sales — and used that money to pay state income, sales, property and other taxes. “We just completed a survey that found 35 percent of 25,000 affiliate businesses lost more than half their business,” Madigan said. “And 32 percent have moved out of California, or are planning on it. This is far greater devastation than we predicted.”

Even if some compromise is reached among Amazon, the California Legislature and Gov. Brown, many of these businesses may never return to California. They may fear the state’s unpredictable anti-business climate.

It’s also too early to see the fiscal impact of a tax increase that’s only two months old. But George Runner, a member of the state Board of Equalization, warned that the hoped-for revenues of $200 million from ABX1-28 not only would not be collected, but that the tax could be so onerous that it would destroy more tax revenue than it took in.

Madigan’s survey showed that Runner’s warnings well could come true.

Congressional Action

Amazon obviously is a smart company.  So it’s a good question what its real congressional strategy is.

Surely, Amazon knows that almost all Republicans in the U.S. Congress have taken Americans for Tax Reform’s Taxpayer Protection Pledge. It’s the same pledge that this year kept Republicans in the California Legislature solidly together in opposing any tax increase in the state taxes.

With an election coming up next year, the chances are slim and none that Republicans in Congress would impose a national online sales tax increase to appease tax-increase Democrats in the California Legislature and Democratic Gov. Jerry Brown.

Republicans expect to ride anti-tax sentiment into a bigger majority in the House, taking over the U.S. Senate and the White House itself. Enraging Brown and California Democrats would be lagniappe.

Currently, 236 U.S. representatives and 41 U.S. senators have taken the pledge. That’s 54 percent of the U.S. House. And the 41 senators could filibuster any tax increase.

Amazon still has a lot of time. If the compromise is accepted in California, then it would avoid paying the tax until a year from now. In the meantime, we’ll no doubt have studies showing how the Amazon tax really was a negative tax — killing more revenue than it brought it. We’ll have real numbers.

Across the next year, Congress would not be taking any action, throwing the ball back to California.

Amazon then could bring back its initiative for the November 2012 ballot — just as the new tax was digging in not just on affiliates, but on all Amazon purchases. Hundreds of thousands of Amazon buyers — and those buying on other sites — would be hit with the new tax just as they were making major Christmas purchases.

And just as they were about to march to the voting booths.

UPDATE, 10:25 am, Sept. 9, 2011:

George Runner, the Board of Equalization member, just released the following statement on the negotiations:

“I’m withholding judgment until I see the actual language of the deal. But I can say this much: any deal must be about California jobs.

“Will this deal protect California’s remaining affiliate businesses? Will it bring back the businesses destroyed by the failed ‘Amazon Tax’?

“Will it encourage new investment and job creation in our state by Amazon and other online retailers? Or will it continue to punish those out-of-state companies that dare to provide jobs and income for Californians?”

Update, 11:52 pm, Sept. 9, 2011

The bill implementing this action, AB 155, just passed unanimously in the state Senate. So all the Republicans voted for what effectively is a tax increase, albeit apparently delayed a year.

Tags: Amazon, Amazon tax, California budget, California Legislature, Jerry Brown, John Seiler, Taxes