Wednesday, February 24, 2010

California Proposes an Online Sales Tax

California is facing a great budget deficit in recent years and its lawmakers are seeking for any additional sources of funding. And it seems they have found a new source of revenues to the public purse – taxing online purchases of HDTV, Kindle and many other products that e-commerce sell in California. The e-commerce giants have avoided paying sales tax in California because they have no office buildings, warehouses or stores located in the state .

But California claims that the e-tailers does have a presence here. How is the state proving it?

The state Legislature is considering a bill ABX8 8 proposed by California Revenue and Taxation Committee that says California Web sites, known as affiliates that send customers to Amazon and other e-commerce companies in exchange for a commission, comprise a sales force of the e-tailers. So this circumstance gives Amazon and others a physical presence or as a bill says “a nexus” here. According to a 1992 Supreme Court decision, only retailers with a nexus in a state can be obliged to collect sales tax from its residents.

It is estimated that If the bill passes through the state legislature it can garner $ 150 million a year for the state budget. However, there are many opponents of the bill as well as its supporters who lobby it. The opponents, more than 25,000 businesses affiliated with large e-commerce, are afraid that the e-tailer companies, particularly Amazon, will cut off them. It ,perhaps, may result in moving of businesses to another states which is not good for the current California financial condition. In 2008 they had revenues of $202.7 million and paid $18.9 million in state income tax as the Performance Marketing Association said. Industry reports say e-tailers generate about 10 percent of their sales through online affiliates .The supporters of the bill (in state retailers who pay state sales taxes) argue that e-tailers have an unfair advantage over them by not paying sales tax.

Although, the bill proposes large revenues it may threaten another significant source of the budget revenues – state income tax paid by those affiliates from their sales deals.

1 comment:

  1. Very interesting case.

    At one point -- before 2005, I think -- everything purchased online won't be charged a sales tax due to a federal provision.

    Over time, states are able to enforce a companion use tax with lots of online purchases, because companies with "physical presence" in one state will be required to collect sales tax by destinations.

    The CA example raises the issue about whether website servers should be considered a physical presence. A nationwide standard treatment would be preferred to minimize related business relocations.