California Again Mulling an ‘Amazon Tax’

Published May 11, 2010

Scrambling to come up with ways to close an historic $20 billion budget deficit, California legislators are contemplating—yet again—imposing an “Amazon Tax.”

The state Senate this spring passed a bill that would require online retailers, such as industry leader, to charge sales taxes on purchases from state residents and send the revenues to the treasury in Sacramento.

California’s General Assembly has not passed the measure, and Gov. Arnold Schwarzenegger (R) and state politicians came to agreements on ways to shuffle money around through budget cuts and deferments of government outlays to help close the budget gap.

But the state is still far short of balancing its budget, and legislators have indicated the Amazon Tax is still under consideration.

Uncertain Prospects
Schwarzenegger has vetoed bills to impose the tax in the past, saying it would cause an exodus of companies from California’s Silicon Valley. However, California Senate supporters of the tax on Internet purchases say it could raise $107 million annually.

Although the governor has not officially changed his position on the issue, California’s unprecedented budget crisis has opponents of the tax worried the Golden State could follow the lead of states such as New York, Colorado, and Rhode Island that have imposed the tax in the last two years.

Amazon has cut ties with all its affiliates in those states, ending the state’s income tax revenue from Web site owners on earnings made by getting readers to click through to the Seattle-based company.

Declining Revenues
George Pieler, a senior fellow with the Institute for Policy Innovation in Lewisville, Texas, says California should heed the lesson Amazon and other major online retailers are giving to other states that have imposed the tax.

“I think the precedents of and [cutting ties with their] affiliates proves the point,” Pieler said. “You can’t guarantee you’ll end up on the plus side of revenues when you charge the Amazon Tax.”

California Dreamin’
Pete Sepp, vice president for policy and communications for the Alexandria, Virginia-based National Taxpayers Union, says California supporters of the Amazon Tax are dreaming—and not being realistic—about projected revenues.

“The new tax would probably never come close to its projected $100 million revenue-raising potential, because just as in other states, companies like Amazon would simply pull out of California,” Sepp said. “The effect would be a lose-lose situation all around.

“You’d get a loss of economic activity from the firms themselves, fewer business opportunities for affiliate advertisers, and lower receipts for the state—including profit and property taxes,” he added.

Creating a Monster
Sepp has kept track of the growing imposition of the Amazon Tax from state to state, and he says—at least for now—taxpayers in California can breathe a sigh of relief “assuming Schwarzenegger holds firm.”

But many states look to California as a trendsetter, and passing the law there may lead to even more states following suit, he says.

“If the Amazon Tax in California were to become law, it would make a truly terrible idea a bicoastal phenomenon,” Sepp said. “It would only be a matter of time before higher taxes came to the heartland of the country, too.

“This time the laboratory of the states will have produced a predatory monster,” he added.

Playing ‘Wack-A-Mole’
Braden Cox, policy counsel for Washington, DC-based NetChoice, says Amazon Tax bills across the country “are popping up so often it’s like playing whack-a-mole.” But that mole, he says, will end up damaging Internet commerce.

“Online companies and content providers are still experimenting with new models for advertising and distribution,” Cox said. “State laws that use Internet advertising as a proxy for an in-state sales representative will stunt the growth of new business models and distort the evolution of Internet marketing.

“That’s why the net effect of this legislation is all pain and no gain,” he said.

Jim Lakely ([email protected]) is co-director of the center on the Digital Economy at The Heartland Institute and managing editor of InfoTech & Telecom News. This article first appeared in InfoTech & Telecom News and is reprinted with permission.