California lawmakers have reached a compromise with Amazon over state sales tax, ending a back and forth battle that has raged all summer. State lawmakers approved a compromise bill that will give Amazon a one-year break from collecting state sales tax. Amazon’s stock price rose nearly 5 percent on the news.
Part of the compromise includes Amazon agreeing to start collecting California sales tax in September, 2012. It’s possible that this could be circumvented by a federal sales tax that has been proposed in the U.S. Senate. So far, the federal measure has not gained much traction, though.
One possible outcome of the California bill is that other cash-strapped states may see a gold mine in sales tax from online retailers. Brick-and-mortar retailers and their associations have spent years pressuring their states to collect sales tax from online stores.
California Tax Moves
Financially troubled California estimated it was losing US$200 million per year in taxes that it believed should have been levied on e-commerce sales. Generally, a company only needs to collect sales tax if it has a presence in a given state. Amazon has a number of small subsidiaries, as well as thousands of affiliates in California.
When California enacted a law this June that would have required etailers to collect sales tax, Amazon dropped its California affiliates. Amazon also spent $5 million to gather half a million signatures to force a ballot referendum on the issue in June 2012. Another course Amazon was considering was moving its California subsidiaries out of the state.
The compromise now awaits approval from Gov. Jerry Brown. He has not said whether he will support the measure. Last week he rejected an offer from Amazon to build two distribution centers in the California if the state would postpone sales tax collection until 2014.
Amazon did not respond to the E-Commerce Times’ request for comments by press time.
Where Are the Affiliates?
When California said it would begin requiring etailers to collect sales tax, Amazon quickly dropped its affiliates in the state. Some of those affiliates are eager to resume their relationships with Amazon now that a compromise has been reached, although they’re not enthusiastic about its limitations.
“We’ve officially come out in opposition to the Amazon deal. It’s like getting a stay of execution,” Rebecca Madigan, executive director of the Performance Marketing Association, told the E-Commerce Times. “The state has compelled Amazon to collect sales tax. We hope they will at least reinstate their affiliates. When the governor signs the law, I would imagine Amazon would reinstate the affiliates.”
Changes in tax-collection requirements for online retailers could bring about a big shift in the marketplace, as well as a new pool of income for struggling states. The price, though, may be a big dent in online retailing.
“The federal bill is a potential solution,” said Madigan, but “I’m not sure they can get that done in a year. From the perspective of our affiliates, reinstating Amazon doesn’t get them back. Thirty-five percent of our members lost over half of their income when the law passed in June. Thirty two percent said they have moved. Another 20 percent closed their doors altogether.”
Amazon is the big fish in the online pond, but Madigan noted that it’s not just Amazon affiliates that are affected by the California tax decisions.
“There are hundreds of online retailers who have terminated their California affiliates,” she said. “The primary solution that has any traction is Dick Durbin’s federal bill. But I would not bet on that. It would make our problem go away, but you can’t count on it.”
Will the Feds Act in Time?
The compromise gives online retailers and the government a chance to create a tax-collection framework for the complex world of online sales.
“The restoration of Amazon’s affiliates would seem a likely outcome, and this would be a good one for California companies who took a big hit when Amazon pulled out of the State,” Rob Enderle, principal analyst at the Enderle Group, told the E-Commerce Times.
“The goal of the compromise is to allow time for the federal government to enact legislation that would standardize tax-collecting requirements for companies selling online,” Enderle noted. “The Federal government is gridlocked at the moment, suggesting the likelihood it can adopt legislation addressing this issue before the next election is relatively low.”
While the online retailing world is looking for stability, it may not come from a Congress that has a Republican anti-tax majority in the House.
“Etailers like a consistent program, and Democrats are in favor of getting revenue in this way, but Republicans aren’t fond of taxes, and a national sales tax would be problematic for them,” said Enderle. “Not all states are behind this, and there is a concern that the revenues wouldn’t be allocated fairly.”
The California compromise is a minor gift to etailers like Amazon. However, a year is short, and there is no long-term solution short of a federal bill that is very iffy.
“On the positive side, it favors national etailers like Amazon who don’t want to manage different state programs. On the negative side, it represents a federal sales tax, bigger stronger central government, and the money may not make it back to the state,” said Enderle.
There is less than a 50 percent chance federal action will be taken before the one-year reprieve is up, in Enderle’s view. “There isn’t a great deal of compromise in a pre-election Congress.”