Taxing of Internet Purchases

[Kevy Baby]

Here is a topic that doesn't seem to be getting much press (although I may just not have seen it).

California tells online retailers to start collecting sales taxes from customers (http://www.latimes.com/business/la-fi-amazon-tax-20110630,0,4344787.story)

This new law, signed into effect by Governor Moonbeam (I refuse to give up on that moniker), goes into effect on July 1. Several other states already do this.

One important notation about this is that this only affects online sellers who have some sort of presence in California. If you purchase from an online retailer that is strictly in a state other than California, then no tax is collected (the Supreme Court ruled in 1992 that online sellers don't have to collect tax unless they have a physical presence in the state).

Amazon is getting around this by halting association with any partner that is based in California.

While as a consumer, I would prefer they didn't collect tax, I don't understand WHY this is the case: why shouldn't online retailers collect sales tax? Obviously I need to look into this more for the ruling.

Interesting topic.

[innerSpaceman]

Yes, and it's messed up either way. I hate for Amazon and other on-liner's to have an unfair competitive advantage over brick&mortars. But at the same time, tens of thousands of jobs were just lost in California when Amazon cut loose all its CA affiliates to avoid the new sales tax (not to mention all the sales tax revenue to be lost when most of those affiliates move to others states in order to get back together with Amazon).

Of course, this is arguably a new tax, which must be approved by 2/3 of the legislature - meaning this dispute will be tied up in court for years.

This is a total cluserfvck.

[Ghoulish Delight]

It's definitely not a new tax. Everyone up to this point has actually technically been required to pay the tax. But up to this point, the onus has been on the customer to report the purchase to California on your state tax return and do the right thing.

No one does it, and there's no way to enforce it. But forcing retailers to collect and pay it is not exactly creating a new tax.

The reason it was that way is because it raises difficult Constitutional questions regarding inter-state trade. Does California have the authority to do this? The justification is that having any small presence in California, even employees or affiliates, is enough to consider it in-state trade. That seems to be a tenuous definition and will likely be where the legal challenge comes from. Just because Amazon happens to pay some people that do work in California, it seems quite a stretch to treat a transaction that doesn't involve anyone within California (e.g., I buy from a reseller who's locate in Kentucky) as in-state commerce.

[Alex]

I'm in favor of these laws and Amazon's response to them as it made Roger Ebert's Twitter stream easier to tolerate (he would post stuff just to drive purchases as a way to support his online habits, but Illinois is one of the states that recently ran into this and so he was cut off from that stream).

On the other hand, Adam Carolla's podcast is going to have issues if Amazon is really a significant portion of how he justifies that (about 6 weeks ago he spent a fair amount of time talking about how it was the success of the Amazon sponsorhip that convinced him to reject a multimillion multiyear terrestrial radio deal).

While as a consumer, I would prefer they didn't collect tax, I don't understand WHY this is the case: why shouldn't online retailers collect sales tax? Obviously I need to look into this more for the ruling.

It isn't so much "why" as "how." Stores argue that they can't possibly be experts in collecting and dealing with taxes for every jurisdiction that one of their customers might transport the purchased goods to. Especially if they don't otherwise have any presence there (the argument being that there really isn't any fundamental difference between me driving to Vermont and driving back with a pint of Ben & Jerry's vs. them mailing it to me).

And mail order companies went through this more than a century ago which is why most state laws need to be adjusted to deal with modern ecommerce.

This is why, technically, when you currently buy books from Amazon (or a refridgerator in Nevada) you are supposed to voluntarily send the sales tax (aka "use tax") to the state of California. Of course, nobody does this and that is why when a huge volume of business moves into otherwise untaxed channels, the states start to bitch about it.

The law doesn't so much create a new obligation for businesses to pay sales tax as change the definition of what it means to have a business presence in the state. And it makes some logical sense. If Amazon paid a person to sit at a cart in a mall and sell people stuff via a laptop they'd have to pay taxes, but if they instead pay that person to do it from their own home, they don't.

It's one of those situations where everybody involved is 90% right.

[BarTopDancer]

What about person to person sales Amazon hosts? I sell my old electronics on there. My phone was sold to someone in Sacramento. Is he supposed to now pay taxes to me and I pay to the state? Does Amazon handle it?

[innerSpaceman]

Don't the states have enough influence to have a federal law passed requiring Amazon (and its ilk) to charge each customer the sales tax appropriate to their shipping address, and pay that out to the states? It would be pretty comical to watch Amazon claim that was too difficult, when their computers tell me five times a week what they think I'd like to buy next by analyzing every frickin' click I ever make.

[Alex]

Part of it is

a) It isn't just 50 states (minus the ones without sales taxes) but much more local than that (as evidenced by sales tax being different depending on which side of the Walt Disney Resort you're on.

b) Having to maintain the information to allow audit by whatever number of taxing authorities that would be.

Obviously they could do this if they had to, but they don't want to. Plus consumers, for the most part, don't want them to have to do it either. It is hard for me to imagine a huge groundswell for the feds to figure out how to make us have to pay sales taxes that we're currently quite content avoiding (see, for example, the indignant outrage in Vancouver, Washington, any time there is something that cracks down even a little bit on people not paying taxes on large purchases in Portland).

But Amazon has said that if there is a policy, it should be a federal one so they just have to deal with it once.

[Kevy Baby]

The reason it was that way is because it raises difficult Constitutional questions regarding inter-state trade. Does California have the authority to do this?It isn't as through California is a trailblazer on this; from the article I linked to:California is the seventh and largest state in the country to pass a law to collect taxes on out-of-state Internet sales. Illinois, Arkansas and Connecticut acted earlier this year, North Carolina and Rhode Island in 2009 and New York in 2008. Amazon sued to overturn the New York law and lost in the lower courts. The company is paying sales taxes into an escrow account pending an appeal.Stores argue that they can't possibly be experts in collecting and dealing with taxes for every jurisdiction that one of their customers might transport the purchased goods to. Especially if they don't otherwise have any presence there (the argument being that there really isn't any fundamental difference between me driving to Vermont and driving back with a pint of Ben & Jerry's vs. them mailing it to me).As far as to which locality to base the tax on, I think the simple answer is the shipping address. While some might find loopholes, I think this is a simple and safe way to determine the tax base.

And the implementation of assesing, collecting and distributing the taxes, in the grand scheme of things, wouldn't be that difficult. It is simple enough to maintain a database of tax rates by Zip Code, including the entities that need to get what portion of that tax (the California State base rate is 7.5% and various counties and/or cities add their portion on top of that).

There is the added complexity of what is taxable as different states have different tax laws. However, it would be simple enough to add classifications to the lookup tables.not to mention all the sales tax revenue to be lost when most of those affiliates move to others states in order to get back together with AmazonAccording to the article in my OP, this new demand would "raise an estimated $317 million a year in new state and local government revenue" while "the affiliates combined paid $152 million in state income taxes last year..." While this is by no means a complete analysis, I personally would be willing to give up $152 to gain $317

[Alex]

"raise an estimated $317 million a year in new state and local government revenue" while "the affiliates combined paid $152 million in state income taxes last year..." While this is by no means a complete analysis, I personally would be willing to give up $152 to gain $317

I think the point is that if in response to this Amazon simply eliminates the affiliate program California is giving up $152 million to gain nothing (since they won't be getting any sales tax from Amazon) and then if large successful affiliates move to Nevada to stay in business California also loses additional income tax from whatever additional they would have paid.

And again, while maintaining differentiation for each tax jurisdiction may not be that difficult in the grand scheme of things, it also is still a pain in the ass and not particularly cheap to comply with on the purchase end and an even bigger pain in the ass to comply with on the audit end. But I'm not so much arguing for why Amazon shouldn't have to do this, but for why Amazon will not want to do it if they can at all avoid it.

But for anybody who thinks Amazon should have to do this, I would be curious to know how consistently they pay use taxes on purchases from out of state?

[Stan4dSteph]

There is a space to pay sales tax from mail order purchases on the NY state income tax form. It's up to you to determine how much you want to pay in. Any store that has a physical location inside NYS must charge sales tax on a mail order purchase if shipping to an address in NY. We started having to pay sales tax on LL Bean after they built stores here.

[RStar]

What about person to person sales Amazon hosts? I sell my old electronics on there. My phone was sold to someone in Sacramento. Is he supposed to now pay taxes to me and I pay to the state? Does Amazon handle it?

As a seller on eBay, I'm wondering about this also. I have had a buisness before and had to collect, and send in, taxes to the Franchise Tax board. Not as painfull to accomplish as income taxes, but still a pain for a small home buisness to deal with.

[Chernabog]

So now all the California "related" businesses (or whatever they call them) are going to STOP PAYING INCOME TAXES because they're moving out of the state, or will go on to different businesses. If the Amazon law was supposed to generate $150 million in sales tax (which is NOT going to happen now due to them cutting ties), and the affiliated businesses used to pay $150 million in sales/income tax, then the only winners in this situation are Best Buy and Target! California ends up with less money, less business, and fewer jobs. Stupid stupid Democrat financial philosophy. Raising taxes does NOT always equal more money overall.

Here's an idea Best Buy and Target: Lower your goddamn ridiculous full-manufacturer's suggested retail prices and I'll certainly be willing to pay a few extra bucks for the convenience of going to your store to pick it up. I will never, ever pay $29.99 for a blu-ray.

[Ghoulish Delight]

Here's what stinks imo in terms of Amazon is doing.

They've cut off the affiliates, screwing them over. But they still have offices here in California. So it changes nothing. They remain, under this law, required to collect taxes because even without the affiliates they have a presence in California. So cutting off the affiliates is a pure publicity move. They're trying to gain sympathy by saying, "Look at all these poor people we had to cut off to avoid the headache of this law," but in reality doing so avoids nothing. That's a pretty sh*tty thing to do to the affiliates.

[Chernabog]

No, it is my understanding that Amazon does not have offices in California. They have companies they work with that are based in California (i.e. the manufacturer of the Kindle) but no offices themselves.

If you go on Amazon right now, you STILL don't have to pay sales tax in California.

The California law seeks to (unconstitutionally) circumvent a 1992 US Supreme Court ruling on this issue. What Amazon has done is say, if you're going to try and enforce this, then we have the right to circumvent the unconstitutional law.

I think it's a business move and an effort to protest a misguided law. The publicity is secondary.

[Ghoulish Delight]

They do have offices here. My friend just got offered (and perhaps presciently turned down) a job at one. And, even by the Quill v. North Dakota, any office is enough to count as a Nexus.

California's new definition of a Nexus may indeed be too broad. The old definition probably wasn't broad enough. But the fact is, if Amazon is not currently collecting sales tax, while having offices in California, they are ignoring the law, not circumventing it, and doing so at the expense of many small businesses just to push their own agenda. I find that distasteful.

[Chernabog]

Was your friend's office for Amazon, or a subsidiary? According to the NY Times:

"The law had said that an online retailer needed to collect taxes on purchases if it had a physical presence, or a nexus, in a particular state. Any retailer with an office or warehouse qualified. Amazon had no such facility in California."

If your friend turned down a job at an Amazon office in California then Amazon should have been charging sales tax in California BEFORE the law was passed. I have a feeling that your friend was offered something else:

"California’s new law goes further by including related companies, or subsidiaries in its definition of a nexus. Several Amazon subsidiaries have offices in California like A9, which works on search technology, and Lab126, which designs Kindle digital book readers."

There are no Amazon offices in California:

http://www.amazon.com/Locations-Careers/b?ie=UTF8&node=239366011

Plus, if you go to the jobs section and perform a search for all of California, all jobs are listed in Cupertino, CA... for the aforementioned Lab126 company.

[Ghoulish Delight]

Yes, it's a subsidiary. What's your point? The new law includes such subsidiaries (source ('http://www.loungeoftomorrow.com/LoT/showpost.php?p=349129&postcount=16')). So unless they're shutting A9 (and A to Z, which is where my friend was offered), then cutting off the affiliates does nothing to change their status under the new law and they're screwing the affiliates over for now reason other than to grab attention. So my point stands.

[Cadaverous Pallor]

I'm reading this thusly.

Amazon knows the affiliates are indefensible, but the subsidiaries are a new wrinkle that they can attempt to counter in court.

I'm interested to see how this shakes out. Can Amazon just up and move entirely, or is CA kind of necessary, as much of the talent is here?

[Alex]

I'm still curious, as we descend into the technical requirements of following this new law, if anybody here has ever reported and paid the use tax on Amazon purchases as required on line 95 of the 540 (http://www.ftb.ca.gov/forms/2010/10_540.pdf)?

[Ghoulish Delight]

Not I.

[RStar]

Although I know this law only seeks to enforce the law already in place, I am against it. So, no, I have not ever place any figure into the line 95. Californians are over taxed already.

[Kevy Baby]

I'm still curious, as we descend into the technical requirements of following this new law, if anybody here has ever reported and paid the use tax on Amazon purchases as required on line 95 of the 540 (http://www.ftb.ca.gov/forms/2010/10_540.pdf)?Nope. And i know it is a wee bit hypocritical of me.

[Chernabog]

Yes, it's a subsidiary. What's your point?

More or less what CP wrote - I'm sure Amazon's attorneys analyzed the law in relation to Quill v. North Dakota (which I really should get around to reading, lol), and are advising that while the "affiliates" portion of the law is going to be difficult to get around, Amazon has a chance of winning on the "subsidiaries" issue. Hence, they cut all ties to CA affiliates and are not collecting sales tax in CA right now.

I'm not sure who reports the sales tax on their CA forms, though everything I've read states that it is nigh impossible to enforce. Personally I pay plenty of sales tax, which is ridiculously high even after the expiration of the 2-year temporary increase. It is a fundamental philosophic problem, I suppose, that Dems see tax increases as equaling more revenue. Raising taxes actually drives businesses and jobs away, thus leading to lower income taxes overall and a greater burden on the CA economy due to the unemployed.

Again, Best Buy and Target need to lower their prices to compete, plain and simple. When books, cell phones, movies, electronics and groceries are cheaper to buy on the internet (even WITH the sales tax added), Best Buy and Target need to step it up. The only thing going for the brick and mortar stores are the convenience of having the item NOW, and people will pay a few extra dollars for that. But a FEW extra dollars, not like $10-12 more for a blu-ray, or $100 extra for a television.

[alphabassettgrrl]

It has to be a pretty hefty discount or not available for me to buy online. I much rather pick it up in a real store. And I'm willing to pay a bit more. Just like I'd rather pay more than shop at Wal-Mart.

Even though ordering online generally avoids paying sales tax.

[Kevy Baby]

Again, Best Buy and Target need to lower their prices to compete, plain and simple. When books, cell phones, movies, electronics and groceries are cheaper to buy on the internet (even WITH the sales tax added), Best Buy and Target need to step it up. The only thing going for the brick and mortar stores are the convenience of having the item NOW, and people will pay a few extra dollars for that. But a FEW extra dollars, not like $10-12 more for a blu-ray, or $100 extra for a television.I disagree with this, purely on the basis that Target and Best Buy don't seem to be hurting. While they may not be getting your Blu Ray business, they are obviously selling quite a number of them

[Frikitiki]

In Hawaii the legislature attempted to do this two years ago. amazon cut ties before it was even a law. In Hawaii we also have a tax called a USE TAX. If I bring something into Hawaii, I'm supposed to pay a 4% tax to the State of Hawaii. They already have a law on the books, but they don't enforce it (unless you buy a car on the mainland and have it shipped in). Instead of trying to enforce the law on the citizens, they are trying to cut down the number of touchpoints and force the businesses to collect the money making their job easier.

[Chernabog]

I disagree with this, purely on the basis that Target and Best Buy don't seem to be hurting. While they may not be getting your Blu Ray business, they are obviously selling quite a number of them

According to them they are hurting (or, at least that overall sales are down)-- which is the reason for this law being passed in the first place. Their argument essentially is that anyone buying off of the internet gets an automatic discount because they don't pay sales tax, and that they simply cannot compete with that. I think that's a load of BS.

Certain items are keeping them going -- people generally want to buy an iPad or a smartphone from a brick-and-mortar store, for instance, or if they HAVE to get a video game on release date they'll reserve it at Best Buy or Gamestop rather than wait for mail delivery. See i.e. the article below:

http://www.startribune.com/business/123809429.html

[Alex]

So you disagree that it is a disadvantage (regardless of whether it is surmountable) that California businesses (big box store or small mom and pop), all other things being equal, have to charge 10% more for the exact same item than an online retailer?

What if, instead of requiring Amazon to collect the use tax directly, the law instead said that Amazon (and other reatailers) would have to provide (ignoring the question of Quill) to California a 1099 equivalent reporting how much each Californian spent at their web site so as to enable California to effectively enforce the already existing use tax law?

Is this aspect of sales tax similar to how we tend to feel about speed limits. We're ok with the limit being the law, with someone occasionally getting slapped for breaking that law, but it would be viewed as horribly unfair if a way was found to actually give people a ticket every time they actually exceeded the limit.

[Morrigoon]

See I view the no tax thing as just helping to defray the cost of shipping. Now obviously there's that thing where you spend over X amount and get free shipping, but I guess I always figured shipping and tax cancelled each other out, so the internet, for me, competes mainly on base price of the item.

[Ghoulish Delight]

See I view the no tax thing as just helping to defray the cost of shipping. Now obviously there's that thing where you spend over X amount and get free shipping, but I guess I always figured shipping and tax cancelled each other out, so the internet, for me, competes mainly on base price of the item.Except in a physical store, the shipping cost is just built into the price of the item.

[Kevy Baby]

Except in a physical store, the shipping cost is just built into the price of the item.Sort of, but it is not a 1:1 relationship. The cost to ship a single item (online purchase) vs. the cost to ship a pallet of materials amortized over multiple items (brick and mortar).

[Ghoulish Delight]

Sort of, but it is not a 1:1 relationship. The cost to ship a single item (online purchase) vs. the cost to ship a pallet of materials amortized over multiple items (brick and mortar).
Of course. But then there are all of the other costs that come along with a physical store location (property costs, utilities, staffing, etc. etc.).

[Kevy Baby]

Of course. But then there are all of the other costs that come along with a physical store location (property costs, utilities, staffing, etc. etc.).Many of which an internet only retailer also has, but usually MUCH lower as they do not need retail locations in prime areas, which usually also results in lower utilities, etc.

And this isn't meant as a disagreement, just as a discussion of minutiae.

[Ghoulish Delight]

Many of which an internet only retailer also has, but usually MUCH lower as they do not need retail locations in prime areas, which usually also results in lower utilities, etc.
Not just MUCH lower, but MUCH MUCH lower.

Basically, an online retailer has a warehouse (and all the costs associated with the physicality of that) + a warehouse staff + a staff to handle shipping + cost of shipping individual items.

A retail company (and in this thread the focus has been on the big guys, Target et. al) has a warehouse (and all the costs associated with the physicality of that) + retail stores (and all the costs associated with the physicality of that) + a warehouse staff + a (admittedly smaller) staff to handle shipping + cost of of moving stuff from warehouse to retail store + retail store staff. So all the stuff an online retailer has to pay for (minus a small fudge factor due to increased efficiency of not shipping to individual addresses) and THEN all the stuff that comes with brick and mortar.