- The Washington Times - Thursday, July 14, 2011

California’s clash with Amazon.com over online collection of the state’s sales tax has become a political battle for the Golden State and it could rattle Internet commerce nationwide.

Amazon, the world’s largest online retailer, is challenging the state’s new law expanding its sales tax to cover more Internet sales to Californians, saying it would destroy their e-commerce business model.

California, however, argues the state is losing out on millions in sales tax, which online stores were not previously required to collect. Meanwhile brick-and-mortar retailers complain it is unfair to compete with online stores that don’t charge the tax.

“At a time when businesses are leaving California, it is important to enact policies that attract and encourage business, not drive it away,” said Paul Misener, vice president of public policy for the Seattle-based bookseller. “Amazon looks forward to working with tens of thousands of small business affiliates in California that were harmed by the new law’s effect on hundreds of out-of-state retailers.”

The outcome in California could spur change throughout the country and national organizations are getting involved. Some 20 states are considering similar laws and several — such as Illinois, Arkansas, Connecticut, New York, and North Carolina — have already passed them.

Brick and mortar retailers are pushing for the tax, saying they need to “level the playing field” against retailers that don’t charge it.

“Whether you buy a product online or from a brick and mortar retailer, the consumer should be obliged to pay the sales tax,” said David French of the National Retail Federation. He pointed out that companies not only charge sales tax, but they also raise prices to account for the expense of collecting sales tax and paying it to the state.

But online retailers have to deal with their own fees, said Bill McClellan of the Electronic Retailing Association, the biggest of which is shipping and handling. That offsets the sales tax expenses, he argued.

“When you’re selling remotely, there is a lot of friction in that transaction that you don’t normally deal with,” he explained. “There are other costs associated with remote transactions.”

California’s new law would require online retailers to collect sales tax from customers. Previously, customers were responsible for paying it directly to the state, but most didn’t realize this, so it wasn’t an effective means of collection.

Afraid it could cost the company business, Amazon this week began encouraging efforts to collect about 500,000 signatures to put the issue on next year’s ballot and ask voters to repeal the rule.

Opponents, who fear what would happen if voters get to choose, say even if Amazon collects enough signatures, it might not make it on the ballot. The law says a referendum is supposed to be filed before a new law goes into effect — the California law started July 1 — so this loophole could prevent a vote.

“I’m not sure the referendum is legal,” Mr. French said. “I think we are deeply concerned about a referendum here.”

The U.S. Supreme Court previously decided that states can only require retailers to charge sales tax if they have a physical presence in the state. This has allowed online retailers, who only exist virtually, to avoid collecting taxes from customers. But California’s law expands the definition of “physical presence” to include a company’s affiliates and subsidiaries.

The state, with a tax rate of 7.25 percent, hopes to collect another $83 million a year from Amazon’s customers in California and more than $100 million from other online retailers. The first payments would be due Oct. 31.

Amazon, which last year had $34.2 billion in sales, has already dropped 10,000 “affiliates” in California, hoping to wiggle around the law. Overstock.com, a smaller rival, did the same thing to hundreds of its own affiliates.

“Affiliates,” from individual bloggers to small and medium-size companies, post ads on their own websites for products available at Amazon and provide the needed link.

Savings.com, which helps shoppers find bargains, was one of the affiliates that Amazon severed ties with, slicing up to 20 percent of its business. Now, the website, which has 80 employees, will have to lay off workers.

Amazon should be spending less time punishing its affiliates, threatening lawsuits and collecting signatures and more time doing what every other retailer does in California every day,” Evan Westrup, a spokesman for Gov. Jerry Brown, told reporters.

The state’s tax office argues Amazon still has a “physical presence,” because of several subsidiaries that remain. A9, a search technology company, and Lab126, which designs the Kindle, are two in-state subsidiaries that Amazon does not plan to relinquish.

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