I hate to be the bearer of bad news. You know how easy, convenient and tax-free those Kindle downloads and online purchases from Amazon are? Well, it turns out that you’re actually supposed to pay a “use tax” on them. I’m sure that you’re delighted to hear this news. Now you can go home and fill out the special tax forms, and carefully record every future online purchase.
The truth is that online transactions are claimed about as often as people report income from tips – so virtually never. It just isn’t worth it for the government to go after you on small online purchases. Your lack of cooperation is making state governments very cross, and so they have come up with a masterful plan to liberate you from your money. It’s called an “Amazon” tax, and it might soon be coming to California.
A bill proposing this tax has already passed through the state senate. It was designed to close a loophole in tax policy that has caused problems for state governments as well as local businesses. The reasoning is quite sound. Why should states be cheated out of taxes that they are owed, and why should online companies be able to avoid taxes that local businesses have to pay? Avoiding taxes is giving large online companies a competitive advantage, and could be suffocating small businesses in the state of California.
The Amazon tax was crafted by California legislators to get around the Commerce Clause of the U.S. Constitution, which gives federal government the power to regulate interstate commerce. State governments are attempting to redefine where an online company operates.
Under current rules, a company operating in Minnesota could sell online products to California and it would be not be required to collect and pay taxes. Under the new law, California could require them to collect the tax if the online company was affiliated with any state business. This includes other websites and blogs. So out of state online companies will have a “presence” in California without physically being here.
Unfortunately, the proposed solution opens up a few new problems, which could become costly to California businesses and you, the consumer.
The potential danger for many California businesses could be seen in the results that took place after Amazon taxes were proposed in other states. New York and Rhode Island both passed very similar laws.
Immediately after the Amazon taxes were enacted, big companies like Amazon cut off associations with the small time affiliates operating in those states. This marginally damaged those massive companies, but the real impact was on the small, internet-based businesses. They had relied on advertisement deals with Amazon and other large companies to survive, cutting off that revenue threatened their ability to thrive and operate. Even worse is the disadvantage that California businesses will have compared to their neighboring states that will simply forgo the Amazon tax.
Even if you don’t care what happens to small businesses in California, there will still be an impact on you, the consumer. If large online retailers decide that California is too big of a market to give up, then instead of abandoning the small, local companies, the large online retailers will simply accept making their customers pay the new tax. The Amazon tax is going to hurt somebody, and it’s probably going to be you and me.
There is a better way of closing the tax loophole without punishing the small businesses and citizens of the few states that have adopted the Amazon tax. These laws should be made at the national level, or simply not made at all. The revenue that will be generated from this new tax – which has been estimated to be around $100-150 million dollars – will not fix the California budget, and it more likely to cause people to flip out when they see a significant increase in the price of their online purchases. It might not even be legal, as the constitutionality of the law is still in question.
The lack of uniformity across all states creates a situation that is very good for some and bad for others. The most important question we should ask is how is this going to improve California’s economy and make our lives better? It doesn’t create jobs, it doesn’t raise enough money in the grand scheme of things and it takes money away from people who could use it elsewhere.
JARRETT STEPMAN isn’t clamoring to pay taxes on his Kindle purchases. If you want to tell him how you feel about this, send him a message at jstepman@ucdavis.edu.
