California Prepares for the “Amazon Tax”

California Prepares for the

As I noted a little over a month ago, it’s just a matter of time before we’ll all be compelled to pay sales tax on our online purchases. In fact, for Californians, that day will come later in the week.

Though California residents, like most of us, have technically been required to pay a sales (or use) tax on their online purchase all along, there was never a mechanism in place for collecting this at the time of purchase.

But on September 15th, that will all change when AB 155 kicks in. At that point, all online retailers that have more than $1M in sales to California residents in the past year and have had more the $10k in sales referred to them by California affiliate marketers will be required to collect sales taxes.

In other words, the so-called “Amazon Tax” casts a much broader net than just little old Amazon. The bit about affiliate marketing relates to how California is defining a “physical presence” (nexus) in the state. This requirement dates back to a Supreme Court finding in 1992 that held it unconstitutional for companies to be forced to collect sales taxes in a particular state if they didn’t have a physical presence there.

For those that don’t know, affiliate marketing refers to the practice of referring sales to an online merchant in return for a small fee — often calculated as a percentage of the purchase price. So even if a company is located entirely outside of California, if they have an affiliate program (and they sell over $1M/year to CA residents), then chances are they’ll be subject to the tax.

What can online merchants do about this? Not much. Once laws of this sort go into effect, the responsibility for collecting sales/use taxes will shift from the state to the merchant. For those with an affiliate program but no physical operations in the state, they could opt to shut down their affiliate programs, or at least kick out all of their California affiliates. However, in doing so, they would presumably lose a bunch of sales.

As an alternative, they could simply choose not to collect the tax from the buyers. In this case, they would be obligated to pay the taxes themselves. But given the complexities associated with tracking and collecting taxes at the time of purchase (with different treatment for different states), it might be easier to simply build the tax hit into their prices and deal with it after the fact.

It will be interesting to see how this all plays out.

8 Responses to “California Prepares for the “Amazon Tax””

  1. Anonymous

    Good for the citizens of California. Now if only my state would grow some balls and do the same — I’m sick of subsidizing the tax dodgers (if you live in my state, then you are already supposed to be paying the use taxes).

    Comment #3 is a perfect example.

  2. Anonymous

    I wonder what will happen when they decide to tax me. In my state there is a multitude of entities collecting sales taxes in various geographic areas. I live outside a city which has a sales tax, but I have the same (5-digit) zip code as that city. When I buy something from Dell, for instance, I have to fight with them over their trying to collect the city tax for a city I don’t live in! It’s a nightmare, and Amazon should continue to fight it except for states that have a uniform sales tax statewide.

  3. Anonymous

    California’s sales tax form includes 4 pages of district taxes, levied by some cities and counties. The rates vary. In addition to keeping track of sales in the state of California, the merchant will also need to track sales subject to each district tax, and sales not subject to any district tax.

    What a pain for the merchant!

  4. Anonymous

    Actually Amazon gave in to this and is already collecting sales tax for a few other states. They gave in as part of a massive strategic shift in their marketing. Their current marketing strategy is to operate huge warehouses in cheap states and ship products from the cheap states to the rest of the country. They have been very successful with this strategy so far. But that is about to change.

    Amazon’s new strategy is to open *local* distribution centers across the US with new shipping options. You can get SAME-DAY delivery within the metro delivery area. Also they are looking at setting up stations around the metro area with lockboxes that they will deliver to — you can purchase an item online in the morning and then pick it up from a dropbox on your way home after work. It’s Amazon meets Redbox in a sense.

    Amazon is investing *billions* to make this happen. This will be unbelievably disruptive to local businesses and a huge threat to its main rival Wal-Mart.

    Slate has a really good article on this:

  5. Anonymous

    Great article – definitely something that needs light shed on it! I live in a state that recently began collecting tax on Amazon purchases and I am definitely not a fan. I travel for work, so I have had a couple of smaller items shipped to my hotel in a different state to save the sales tax. Unfortunately, not everyone can do that, and of course – more states are getting on board this “Amazon Tax” gravy train.

    I do see some benefits to the smaller online merchants who sell through Amazon and don’t meet the $ thresholds. These merchants (mostly smaller businesses) won’t really impacted, so they can sell without adding on sales tax, which will probably cause their sales to increase.

    On a lot of items (mostly electronics) the pricing is the same online vs. physical store, so it’s the no tax/free shipping that pushes people to buy on Amazon. With these new limitations, I wonder what that will do for Amazon’s competitive advantage…

  6. Anonymous

    I doubt Amazon actually gets that much out of their affiliate program. At least, personally I see more links “use my amazon affiliate link to earn me some money” verbiage than I do see normal affiliate links. Unless Google is decorating search results with their affiliate ID and I never noticed…

    Collecting sales tax is complicated, sure, but only because there’s no centralized system for doing so. If each municipality was forced to enter their tax information, say broken down by zip code, into a centralized database, then the problem would become relatively simple to solve.

    Anyways I live in WA and shop at Amazon despite paying sales taxes (which I would have legitimately owed but not bothered to pay if I lived in a different state). So I think, some day we will all pay sales taxes on online purchases, and it won’t seem like a big deal.

  7. Anonymous

    Glad I don’t live in California. As you said you are supposed to pay use tax anyway, although most individuals don’t. Big corporations definitely pay use tax though, but I bet many of them didn’t shop at Amazon…

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