Friday, July 01, 2011

How do you tax the Nowhere Man?

When sales taxes, gross receipts taxes and the like get much above 1%, and when don't they, retailers who don't have to pay that tax have a significant advantage over those who do.

So, catalog order companies like Amazon (in Guambat's day, Sears, Montgomery Ward and the like, and in Mrs. Guambat's days, Lands End and Williams-Sonoma and a myriad of others) get more than a virtual leg up over the bricks and mortar mortal because, under pre-web days, the US laws required some physical presence "nexus" before you could tax those mail-order sales.

But at the break-nexus speed of email-order sales, it is arguably time to have a rethink of the level playing field of tax policy (or, fantasy).

Amazon does not have a price advantage over other book (etc.) stores, it has simply externalized pre-tax overhead expenses and post-tax profits. And you can expect plenty of argy-bargy and spin as the coddled e-industries try to hide their profits from the taxman, and continue their externally taxpayer underwritten e-infrastructure, and their competitive advantage over the local showrooms and sales forces.

Nudging toward a new direction, but with caution born of identifying some kind of tangible nexus, California has joined a growing list of states trying to capture some of the tax base that the online world represents and virtually avoids.

Amazon to shut down California affiliates over new sales tax law
Late Wednesday, California joined the growing list of states attempting to collect sales tax from online retailers like Amazon in an effort to help close the state's vast budget deficit. Amazon, in typical fashion, has aggressively pushed back, warning its California-based affiliates that they'll have their revenue streams cut off as of September 30 if the law ends up being enacted.

California's new law, signed by Governor Jerry Brown on Wednesday, requires online retailers to collect sales tax even if they have no physical presence in the state. How does that work when federal law states they have to have a brick-and-mortar store to qualify? Like the many other states before it, California counts Amazon affiliates who reside in California as a "physical presence." So, if Joe Blow runs a personal blog with affiliate links to Amazon products (you know, to make a few bucks on the side), he is effectively "selling" Amazon products and making money from them via his home in California.

Because of this "physical presence" technicality, the state wants Amazon to begin collecting sales tax from California residents, and subsequently pay it back to the state.

California's—and other states'—laws don't just affect Amazon either, despite the "Amazon Tax" moniker. Plenty of other sites offer similar affiliate programs (,,, to name a few) and will either have to rework the way they do things with California residents or cancel their affiliate programs as well. eBay also claims to we worried about how the tax affects small businesses and individuals who are not actually involved with these large corporations. "We believe that putting a tax burden on small businesses and treating them the same as giant retailers is unfair," eBay senior director of government relations told Internet Retailer. "eBay is advocating a threshold that accurately defines a small business, so that the sellers that are getting started aren't held back from growing in across the US."

Amazon’s bad argument By Ezra Klein
I just received this e-mail from the company, as back when I had a personal blog, I was a member of their affiliates program:

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants...

We oppose this bill because it is unconstitutional and counterproductive. It 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, new tax revenue. We deeply regret that we must take this action...
Let’s be clear: Amazon opposes this bill because it wipes out a price advantage they currently have against their competitors.

And, as the Center on Budget and Policy Priorities has explained at length, their other arguments simply don’t add up.

Now, Amazon is a business, and so you can’t fault it for playing hardball in an effort to retain a competitive advantage. But this is bad policy that they’re trying to protect — it’s starving states, killing brick-and-mortar stores and encouraging a race to the bottom among states who want to attract the offices of online retailers. Brown is right and Amazon is wrong.

Guambat is sure there's some kind of hedge play for this situation, but reckons he'll hedge by going to that little shed out back and retrieving that Sears and Roebuck catalog. And replace it with his iPad.



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