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Why a New Online Sales Tax Means Lost Dollars for California

written by: •edited by: Michele McDonough•updated: 7/14/2011

An attempt to increase empty budgets by forcing Amazon to pay sales tax has backfired in California as local affiliate agreements are cancelled. Is it right to demand sales taxes from online businesses in the current economic climate? And what of the 10,000 affiliates with newly reduced income?

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    Online Sales and Taxes

    The world is a very different place in 2011 compared with 20 years ago. Back then, a computer would get you online via emails and bulletin boards, and any shopping you did for hardware would be through mail order or by visiting specialist stores. There were no websites, advertising your services cost money, and the ability to hook up with a major multinational retailer and share in their success came at a massive price in the shape of franchise agreements.

    Thanks to the development of the World Wide Web and the HTTP protocol, the changes that we see around us were made possible by the digital explosion of the late 1960s and early 1970s which centered on Silicon Valley in California, the various companies that sprung up and the later “dotcom boom" of the late 1990s and early 2000s.

    Recent developments in California, however, look set to push the state back to the dark ages in terms of employment and appreciation for what companies based there have achieved over the past 50 years. The introduction of a sales tax (vetoed by former Gov. Arnold Schwarzenegger in 2009, but recently reawakened) to supposedly protect jobs at brick and mortar stores has already had the reverse effect.

    Why on earth would a bill that kills income stone dead in this way get passed?

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    King Canute

    You may well know the story of the Viking King Canute who is recorded as having had his throne carried to a beach on the English coast in an attempt to prove that even the incoming tide would bow to his command.

    While revisionist history suggests that Canute was more likely to have been proving that he couldn’t halt the tide, the allegory with various US states – particularly California – on behalf of major players like Wal-Mart in the face of success from Amazon and is obvious. A similar pattern is occurring across the USA, but the fact that this threatens the very existence of something created by the efforts of hardworking Californian Americans is somewhat ironic.

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    The Principle of the Bill

    Amazon and the sales tax bill By its existence, an online store doesn’t have to pay the sales taxes ruled in a 1992 U.S. Supreme Court ruling, simply because the store has no physical presence. The intention of the bill was of course to force sales tax to be collected in the home state of the retailer, presumably for telephone and mail order purchases.

    The new bill forces online companies such as Amazon to collect sales tax if the business has an in-state presence – something that the world’s largest online retailer has refused to do by cancelling its affiliate agreements with all bloggers and businesses in California.

    Let’s just repeat that:

    Amazon has cancelled affiliate agreements with 10,000 bloggers, online businesses and other affiliates who are based in California.

    The purpose of the bill is supposedly to protect jobs, but already people’s livelihoods have been stolen from them at very short notice. Amazon isn’t entirely innocent here, but with similar actions being instigated by states across the USA, they have made the decision to avoid becoming de facto tax collectors.

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    How Can California, of All States, Let This Happen?

    According to one of the business affected by it, the implementation of this sales tax law is unconstitutional, and has already had the effect of reducing the incomes of bloggers and small online businesses by quite considerable amounts. As a major online retailer with a popular affiliate network, Amazon contributes millions of dollars every year to websites promoting its products.

    The hit goes deeper, however. While bloggers could conceivably migrate to a state where similar taxes haven’t been enforced, this is of course completely impractical for the majority. It isn’t just bloggers that are affected either – small businesses with an online presence are hit by this tax.

    Just what is happening here? This is clearly a major case of shutting the stable door after the horse has bolted, with several states and the Federal government lording it over the incoming tide of progress and the shifting of the balance of power.

    If anything, this is a major dereliction of California's heritage, and its contribution to modern society across the world.

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    How Can Websites Work Around This Loss of Income?

    The effects of no income from Amazon The beauty of the Internet is that things change so quickly. While California will be losing both the expected sales taxes and a reduced tax on the income of affiliates of Amazon and other affected parties, the poorly researched and clearly insane decision by California can be quickly circumvented by some imaginative web developers.

    While Amazon’s tactic of bringing a lawsuit against the state of New York (another of the proponents of the so-called Amazon tax) will help it to stave off the pressure to pay the taxes and raise their prices – thereby losing one of its major selling points – they have already offered an olive branch elsewhere in the state of Texas.

    Instead of accepting the tax here, Amazon is instead offering to spend $300 million on job-creating distribution centers and setting up a separate website for voluntary payment of sales taxes by Texans.

    The next step for many smaller online businesses could be to move their base of operations abroad, perhaps to Canada, Mexico, or the EU. With the help of overseas web hosts, a change of domain name and the registration of the business to a post office box this could be made possible.

    But would this be enough? Or, is California's stance here just a sign of things to come?

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    Amazon to California: Read My Lips, No Online Sales Tax ,

    California vs. in Sales Tax Battle,

    Wolford, Josh. "Amazon Attempts Sales Tax Workaround in Texas",

    Image credit: Wikimedia Commons/Tryphon

    Screenshot provided by author.