Fewer Books, More Potholes

by William Petrocelli

How many new teachers could you hire in California for $48,000,000 per year—1,000, maybe more? How many police officers or fire-fighters could you employ? How many books could you buy for school libraries—5,000,000? You could get at least that many.

$48,000,000 is the estimated amount of revenue that California loses each year by Amazon.com’s refusal to collect and pay sales taxes in this state. If you consider that Amazon has been thumbing its nose at California tax laws for more than a decade, the amount lost is probably well over half-a-billion dollars. You can point the finger at Amazon for this scandal—and you should—but please save a digit or two for the California Board of Equalization, which is the agency that should be enforcing the law against them. Because of the BOE’s foot-dragging, the rest of us have to cover this revenue shortfall.

Who Gets Hurt?
Lots of people get hurt as a result of the tax holiday that Amazon.com has carved out for itself. Local communities take a big hit, because that’s where most sales tax revenue goes. When you’re talking about loss of sales tax, you’re not talking about some vague government programs—the loss of sales tax means fewer library books and more unfilled potholes.

Local businesses also suffer—and when they suffer, the rest of the community may suffer because of a negative domino-effect. By not collecting sales taxes, Amazon and others like them enjoy at least a 7.5% price advantage when competing for customers. In businesses where competition is fierce and profit margins are low (bookselling, alas, comes to mind) that’s a huge advantage. If such tactics force local stores out of business, the negative domino-effect kicks in: i.e. the community loses all the tax revenue on the local sales that the now-defunct stores no longer collect.

Lower income people also get hurt—this is a sad fact that isn’t often discussed. Because sales tax is a flat rate tax, it is very regressive; lower income people pay a much higher percentage of their income in sales tax than more affluent people. Over the last several decades the sales tax rate has at least doubled, aggravating
this disparity.

Amazon’s policies have made a bad situation worse: by not collecting sales tax from their on-line shoppers, they have, in effect, forced everyone else to cover the cost of local government. This hits hardest on lower income people—those who are unable to shop on-line. To be an internet shopper, you need at least four things: (1) a computer, (2) an internet connection, (3) a credit card, and (4) a fixed delivery address. There are many low income people who are without one or all of those, and they are the ones who are ultimately stuck with the bill for sales taxes.

Why Do They Do It?
Not Amazon—we know why they do it: their refusal to collect and pay sales tax gives them a huge competitive advantage.

No, the question is why do non-profit groups that support schools, libraries, parks, and other good causes become “Amazon Associates” and promote sales of Amazon.com products through their websites? Their instincts may be good—they’re trying to raise a little money through the affiliate-fees to support their cause—but the effect is totally self-destructive. Such groups need to think about one fact: each sale that they promote through their website actually harms the cause they are working for. Why? Because the amount they receive in affiliate fees on such sales is actually less than the amount that the community loses in sales tax. Many such organizations exhort their members to make all their purchases through such Amazon links, but the members, thankfully, usually have more sense: they realize that the end result of such behavior would be to force local businesses to close, thus drying up all the sales tax revenues that are essential to their communities.

This is a maddening situation for local businesses. Not only do they collect and pay the sale taxes that their communities rely on, but most of them do hundreds of other things—some financial, some non-financial—to support local activities. In an earlier article (News & Reviews, March-April, 2006), we pointed to studies showing that for every $100 spent with a local retailer about $73 remains in the community—that’s $30 more than the $43 from a typical chainstore. As great as that disparity is, it’s nothing compared to Amazon.com: every last penny of the $13 billion that they take in leaves the community.

This is an area where local groups can take a stand—they don’t have to wait for the Board of Equalization to get off of its collective posterior and enforce the law against Amazon. If such groups want to raise money through on-line affiliate programs, there are plenty of local businesses that can provide their members with a full on-line sales program that does not denude the community of its sales tax revenue (we have such a program; there are others as well).

How Does Amazon Get Away With It?
It’s simple: Amazon.com claims it is a purely out-of-state business with no local “nexus,” and the Board of Equalization has been too timid to challenge them on it.

California law requires out-of-state companies to collect sales tax if they have “any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state” for the purpose of “selling, delivering, installing, assembling, or the taking of orders …” (sec. 6203; Rev & Taxation Code). It doesn’t take much for a company to fit under that law—almost any activity by any kind of agent will create “nexus.” For example, an out-of-state company that solicited book sales to grade school students only through volunteer, unpaid teachers was found by the courts to have a nexus with the state. Likewise, a company that merely received requests for purchases from a small group of independent agents was ruled to have nexus. Nexus is the key: once a company has it, it is liable for sales taxes on all of its sales in the state—not just the ones involving such agents.

How does Amazon.com fit within that legal framework? It bursts the sides of the frame. It’s no exaggeration to say that Amazon.com probably has more “solicitors,” “agents,” and “representatives” in this state than most California-based businesses. Consider the Amazon Associates program mentioned above—there are probably well over 200,000 people and organizations actively soliciting sales for Amazon through websites, meetings, personal contacts and other activities in the state. The in-state activities of these agents are far more extensive than those of other companies that have been required to collect sales tax. In addition, Amazon continues to act from time to time as the on-line sales and distribution service for several local chain stores—you go in to see about videos that your local store has for sale, and you are likely to be directed to Amazon for the purchase. Finally, there is the Amazon Advantage program, in which private individuals arrange to sell merchandise through Amazon. Under that program, thousands of California residents each day deliver merchandise to other California residents using the Amazon system to consummate the sale. What is the difference between the purchase of, say, a power tool sold this way and one sold over the counter at your local hardware store? There is none—except the Amazon sale evades taxation.

The evidence of Amazon.com’s nexus in California is so overwhelming that it’s hard to see how anyone can ignore it. The only reed that their supporters cling to is a 1992 U.S. Supreme Court decision (Quill v. North Dakota) in which the Court said that a state could not impose sales tax liability if a company’s “only connection with customers in the [taxing] State is by common carrier or the United States mail.” But the Quill case is a pre-internet decision—as far as the realities of on-line commerce are concerned, it might as well have been written in the Middle Ages. Unlike the relatively small, traditional mail-order company in that case, Amazon.com has a ubiquitous presence that has an impact on almost every aspect of modern commerce. Amazon’s reliance on the Quill case probably wouldn’t withstand the first challenge.

But first, there has to be a challenge—the Board of Equalization is the only agency that can do that. If the BOE is unwilling to force companies like Amazon to collect and pay taxes, it might as well shut down its operation: in the future there may not be any traditional retailers left to do the tax-collecting for them.

Contact the California Board of Equalization

If you want to express your views on this matter, we suggest you contact the five BOE members:

Betty Yee (1st District—Chair) - (916) 445-4081
Board.MemberD1@boe.ca.gov • 450 N Street, MIC: 71;
Sacramento, CA 95814
Bill Leonard (2nd District) - (916) 445-2181
400 Capitol Mall, Suite 2340; Sacramento, CA 95814
Michelle Steele (3rd District) - (916) 445-5713
450 N Street, MIC:77; Sacramento, CA 95814
Judy Chu (4th District) - (916) 445-4154
450 N Street, MIC:72; Sacramento, CA 95814
John Chiang (State Controller) - (916) 445-2636
P.O. Box 942850, Sacramento, California 94250-5872

Amazon’s Success: Tax Avoidance, Rather Than Savvy Entrepreneurial Spirit

by Dean Baker

The following is excerpted from an article that appeared at TruthOut.org on October 30, 2007. Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and as an assistant professor at Bucknell University.

Tax avoidance, rather than savvy entrepreneurial spirit, is the key to the retailer’s achievement.

Last week, the business press reported Amazon.com had record third-quarter profits as its stock price approached dot.com bubble peaks. We should all be joining in the celebration of Amazon’s success because, as taxpayers, we deserve most of the credit.

The business press has written numerous stories explaining how Jeff Bezos, Amazon’s founder and CEO, is a truly brilliant businessman. This may well be true, but the secret of his success is not in the futuristic world of the Internet, rather it’s in the old-fashioned world of tax avoidance. The key to Amazon’s profits is its customers do not have to pay sales taxes on their purchases. In effect, Amazon has been allowed to set itself up as a virtual tax-free shopping zone.

The point here is simple: if someone goes to their neighborhood bookstore, clothes store, toy store, or even Wal-Mart (Amazon sells just about everything these days), they generally have to pay sales tax on whatever they buy. In some states, the sales tax can be higher than 8 percent, costing a family $16 or more on a $200 purchase
To see how important the tax subsidy is, Amazon earned just under $400 million in profits last year, which is approximately equal to 3 percent of its $13 billion in sales. If we assume an average state sales tax of 4 percent on purchases, Amazon’s tax subsidy exceeded Amazon’s profits.

While Amazon and its customers can both be happy about this situation, this is not a classic win-win story. The sales diverted to Amazon and other Internet retailers came at the expense of old-fashioned brick and mortar retailers who haven’t mastered the 21st century skill of tax avoidance. These old-timers are losing business and profits because of Amazon’s tax subsidy.

State and local governments are also losing tax revenue. This means these governments must either cut back services provided to their residents or they must raise other taxes. Of course buying goods over the Internet does not reduce the demand for services from state and local governments. So, when politicians promise not to tax the Internet they are in effect promising to have higher taxes on items other than Internet purchases.

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