A new California tax collection requirement mandates that large out-of-state retailers, such as Amazon.com and Overstock.com, collect sales taxes on all online purchases made by customers in the state of California. The new legislation was signed by Gov. Jerry Brown last week and went into effect on Friday, July 1, 2011, coinciding with a nominal 1% decrease in state sales tax.
Until now, California law, based on a 1992 U.S. Supreme Court ruling, has stated that any company with a physical presence or nexus – which includes workers, offices and warehouses – in the state of California must tax customers. By building its facilities in other states, Amazon has avoided collecting sales tax in the state since the company’s founding in 1994.
Not collecting taxes has given Amazon what some consider to be an unfair competitive advantage over its rivals – including small businesses and big-box retailers such as Target, Wal-Mart and Best Buy – who have a presence in California and therefore must collect sales tax from customers.
Additionally, because many online retailers don’t charge sales tax, customers carry the responsibility of declaring purchases on their state tax form. Although residents are legally obligated to report this information on their tax returns, few actually do, making them susceptible to a tax audit and contributing to the estimated $1.2 billion in unreported purchases that the state of California is missing out on.
The aim of the bill passed last Wednesday is to close the loophole that Amazon.com and other out-of-state retailers have enjoyed thus far and to minimize the financial impact that undeclared purchases have on the state.
The new statute broadens the definition of a nexus to include a company’s affiliates, related companies and subsidiaries. This means that sellers who pay commission to California-based Internet sites for referring buyers, as well as sellers who have a related company operating in the state, will qualify for the new sales tax requirement.
State legislators expect the new tax collection requirement to raise an estimated $317 million a year in new state and local government revenue. However, it may ultimately cost the state.
Amazon.com has responded to the new bill by cutting off thousands of its California Internet marketing affiliates, telling them that in order to continue earning commissions for referring click-through customers, they would have to move to another state. Amazon has approximately 25,000 California-based affiliates, from which the state collected a total of $152 million in income taxes last year. Many of these affiliates are likely to heed Amazon’s advice and leave the state.
Since 2008, New York, North Carolina, Rhode Island, Connecticut, Illinois and Arkansas have all begun taxing out-of-state Internet sales. California becomes the seventh and most populous state in the U.S. to enact such legislation. Amazon.com is currently battling the issue throughout the country and is expected to fight the new California law in court.
