Federal Internet Sales Tax Now!

Kudos to California for collecting sales tax on items bought over the internet and shipped to Californians from out of state. Story: California tells online retailers to start collecting sales taxes from customers

Beginning Friday, a new state law will require large out-of-state retailers to collect sales taxes on purchases that their California customers make on the Internet – a prospect eased only slightly by a 1-percentage-point drop in the tax that also takes effect at the same time.

Getting the taxes, which consumers typically don’t pay to the state if online merchants don’t charge them, is “a common-sense idea,” said Gov. Jerry Brown, who signed the legislation into law Wednesday.

The new tax collection requirement – part of budget-related legislation – is expected to raise an estimated $317 million a year in new state and local government revenue.

But those taxes may come with a price. Amazon and online retailer Overstock.com Inc. told thousands of California Internet marketing affiliates that they will stop paying commissions for referrals of so-called click-through customers.

That’s because the new requirement applies only to online sellers based out of state that have some connection to California, such as workers, warehouses or offices here.

Both Amazon in Seattle and Overstock in Salt Lake City have told affiliates that they would have to move to another state if they wanted to continue earning commissions for referring customers.

“We oppose this bill because it is unconstitutional and counterproductive,” Amazon wrote its California business partners Wednesday. Amazon has not indicated what further actions it might take to challenge the California law.

Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out.

Wow, so Amazon is refusing to collect the tax, and telling private sellers in California to find some other way to sell their books or move to another state. This is ridiculous!

I’ve worked on programming websites to handle state sales taxes before, and it is insanely difficult and complicated. All the states and cities have different rules and the rates are always changing, and companies have “brick and mortar” presences in some states but not in others. And there are different ways of having to collect and report and turn over the tax. It’s too much for most companies to handle, so they either get discouraged and stop selling over the internet, or they bungle their way through with lots of stress and fear that takes up way too much of their time and hurts their business, or they have to buy an expensive subscription to a  third party system and run monthly updates to keep up to date, and pay for ten programmers to integrate it into their existing system and keep it running without slowing down the system too much. Sure, writing Vertex calls paid for most of my CD collection in the 90’s, but there are surely better uses of everyone’s money. The system should be replaced with a simple national internet sales tax of 10%, paid to the federal government as part of the transaction, and distributed back to the states where the item is shipped.

The complexity of knowing what to collect and how to pay other state’s sales taxes is why the Supreme Court ruled that mail order companies can’t be forced to deal with it. And why they came up with that terrible “brick and mortar presence” rule that makes life so difficult for Amazon sellers and companies considering expanding into another state. But they never said the federal government couldn’t impose a sales tax on all internet transactions and make every website in every state collect it. Who even knows what state Amazon is in anyhow? They are in every state.

Just as the Full Faith and Credit clause calls for federal legislation, that court case calls for federal legislation to improve the wasteful and costly current system and collect and distribute sales taxes.

Brown’s signature on the budget bills is aimed at closing a loophole that freed Amazon and other out-of-state retailers from collecting sales taxes for California.

Not collecting sales taxes gave Internet retailers a competitive price advantage over California’s small businesses such as independent booksellers and big-box retailers with a presence in the state, including Barnes & Noble Inc., Wal-Mart Stores Inc., Best Buy Co. and Target Corp.

“You can’t give one segment of retail a 10% discount every day. It’s just not fair,” said Bill Dombrowski, president of the California Retailers Assn., a major player in a coalition of large and small stores supporting the legislation.

California’s new requirement will generate badly needed state revenue and send a signal to Congress that “we want to see a national solution” to the issue of taxing Internet sales, Dombrowski said.

Yes, it’s about time.

About John Howard