E-Fairness Op-Ed: Internet tax avoidance hurts jobs, public

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This column by Lenny Goldberg, executive director of the California Tax Reform Association, and Hut Landon, executive director of the Northern California Independent Booksellers Association, originally appeared in the San Francisco Chronicle on May 17, 2009.

The demise of Cody's Books in Berkeley and Stacey's in San Francisco is a symptom of one of the key changes of our new era: the shift to the massive use of Internet sales instead of community businesses.

We are in a difficult period of transition for retailing in general and booksellers in particular. But it's particularly frustrating when the state's tax policies conspire with out-of-state sellers to inflict major damage on local businesses.

State-sanctioned tax avoidance is in fact what has been happening as a result of the failure of the state Legislature and of the state's sales tax agency, the Board of Equalization, to collect taxes on sales into California by companies with substantial presence in the state. Not only is Amazon.com abusing the law with regard to its massive sales into California, but a whole Web-based cottage industry has grown up based heavily on a business model of avoiding sales tax.

The issue has come to a head over a bill by Assemblywoman Nancy Skinner, D-Berkeley, whose legislation, AB178, is really about enforcing the sales tax law, which the Board of Equalization has failed to enforce. It says, simply, that Internet sellers with agents or representatives in the state have presence sufficient for them to be obligated to collect tax on sales to California and send it to the state.

The business model used by Amazon for years, and now by other businesses, is their "affiliate" program, by which thousands of California organizations and individuals solicit sales under a contractual relationship and receive a commission on the sales. Amazon's long-standing approach has been to gain a competitive advantage over other businesses by avoiding the collection of tax.

Founder Jeff Bezos has said he originally wanted to locate in Alameda rather than Seattle but wanted to sell tax-free into the huge California market. And somehow the company has managed to avoid the law that says that if it has representatives in the state -- its affiliates -- it must collect the tax.

California is not on the cutting edge of this issue. New York passed legislation that serves as the basis for Skinner's bill. Amazon did two things in response: It started collecting the tax from New York purchasers immediately, because it did not want to be liable for the money; and it filed suit. A New York court dismissed the suit, holding that Amazon had a presence in New York, and upheld the state. As a result, a number of states, California included, are attempting to follow the New York law.

However, in California, home to high-tech industries, legislators have been hammered by lobbying from the likes of Google and Yahoo, even though their click-through advertising businesses would not be affected. Worse, an "AstroTurf" campaign of small sellers with Web-based businesses affiliated with a national Web company also has pressured the Legislature. This group serves as a Web-based representative of out-of-state retailers, giving them entry into the California market without collecting any tax on sales. Skinner's bill, they say, will do harm to their businesses, which cannot exist if tax avoidance is ended.

But let's talk about the long-standing harm, caused by an unlevel playing field, to California's existing Main Street retailers. Stacey's and Cody's alone employed about 200 people, generated revenue of $20 million and paid $2 million in sales tax each year. That's $2 million more than Amazon has collected on its book sales. And these small businesses are at the heart of what makes our communities into livable neighborhoods. Yet the state provides what is effectively a 10 percent subsidy for these out-of-state sellers.

Obviously, given the state's fiscal dilemma and the legitimate needs of California businesses, these practices are untenable. Whether traditional booksellers can survive the next wave of electronic book downloads is an open question. Similarly, music sellers have faced the difficulty of competing with digital downloads (which also, unfairly, are untaxed in California and most, though not all, states).

For a brief time in the 1990s, major national retailers of electronics, sporting equipment and books flirted with separating their companies into dot-com subsidiaries so they, too, could avoid tax. Not only was this self-defeating, but it quite possibly was illegal, so that retailers such as Target.com now collect tax on all Internet and store purchases.

But there are, in fact, billions in out-of-state sales into California that unfairly compete with all of our domestic retailers by avoiding taxes, a situation Congress ultimately will need to resolve.

Skinner's bill is estimated to bring about $150 million to California and its cities and counties. It's not going to solve our budget dilemma, but neither can the state afford to let tax revenue that is legally due go uncollected. Hopefully, legislators also will understand that subsidizing Amazon at the cost of our communities is bad economics in severe economic times.

Reprinted with permission of the authors.