A Taxing Tug of War

The Amazon tax hits retailers where it hurts

Back Longreads Oct 31, 2011 By Andrea Kennedy

In the past 10 years, Alzada Knickerbocker of independent bookseller The Avid Reader has seen her revenue cut in half. To help businesses like hers that suffered during the e-commerce boom, earlier this year lawmakers introduced the Assembly Bill X1 28, the so-called Amazon tax law. The legislation imposes new tax collection regulations on out-of-state retailers like online superstore Amazon.com and, ultimately, boosts California’s cash-strapped state budget as well.

But when Gov. Jerry Brown signed the bill into law in June, repercussions from the legislation caused casualties among thousands of other California business owners who are affiliates of those retailers. Julia Wessels of The Frugal Find lost 40 percent of her income the day the law passed — so she moved her business and family across state lines.

Knickerbocker and Wessels are California business owners on opposite ends of the Amazon tax tug of war: those hoping to benefit from the law, and those hurt by it. With lawmakers holding the rope and e-retailers bringing the muscle, the matchup so far has proven one side cannot benefit without sacrifices to the other. 

Before the tax law passed in June, Seattle-based Amazon.com and more than 800 other out-of-state online retailers had not been required to collect tax on sales from California consumers because they did not legally have a physical presence, or “nexus,” in the state.

Knickerbocker, who opened The Avid Reader in Davis in 1987 and also co-owns a Sacramento location, says that Amazon’s 8 percent to 10 percent price break grants those retailers an inherent competitive advantage that is largely to blame for her loss of business.

“All the time,” Knickerbocker says, “customers will indicate quite readily, ‘Oh, I’ll just go online and get it for less.’ ”

That advantage is exactly what legislators behind ABX1 28 were working to end.

“The idea at the beginning was that we wanted to make sure that the in-state retailers and the out-of-state retailers are on the same playing field,” says Robert A. Blanco, legislative aide to one of the law’s authors, Democratic Sen. Loni Hancock of Oakland.

Affirming Knickerbocker’s observation, Blanco says brick-and-mortar stores have become “showrooms” that too often lose sales to out-of-state retailers not collecting tax.

Hut Landon, executive director of the Northern California Independent Booksellers Association (NCIBA), says the rise of out-of-state retailers, especially Amazon.com, has contributed to independent booksellers losing more than 10 percent of market share. And since Amazon alone sells everything from clothing to electronics to home goods, the loss for brick-and-mortar stores goes way beyond books.

Julia Wessels of The Frugal Find lost 40 percent of her income the day the law passed — so she moved her business and family across state lines.

The new legislation, though, is intended to benefit more than California’s storefronts; the state’s suffering bank account could gain hundreds of millions of dollars — perhaps more than $1 billion — annually from previously uncollected use tax, says state Board of Equalization (BOE) member Betty Yee.

Legislation passed in 1935 mandated California consumers pay a tax, called a use tax, when buying from out-of-state retailers. In other words, when purchasing anything from a flash drive to a flat screen TV from Amazon.com or another out-of-state retailer that does not collect use tax, consumers still owe that tax to the state, according to John Goralka, president of Sacramento’s Goralka Law Firm and certified specialist in taxation law. Furthermore, consumers are independently, legally responsible for reporting and paying the tax on their income tax returns.
Californians rarely do.

“As a result of that, we have every year about $1.2 billion that goes uncollected,” says Yee, who sponsored part of the law. She clarifies that the law does not impose a new tax on Californians; rather, it facilitates the process of collecting taxes that have been owed for more than 75 years. Yee admits the BOE has not made it easy for consumers to report and pay use tax to the state, but this legislation changes that.

“It will be so simplified if we would just be able to compel online retailers to collect the tax,” she says.

To compel the more than 800 out-of-state online retailers, most of all mega-retailer Amazon, legislators set out to broaden the definition of nexus with a series of three bills. Assembly Bill 153, led by Democratic Assemblywoman Nancy Skinner (D-Berkeley), indicates that conducting business through in-state affiliates is evidence of nexus; AB 155, led by Assembly Majority Leader Charles Calderon (D-Los Angeles), indicates subsidiary companies operating in the state is evidence of nexus; Senate Bill 234 from Hancock, a “long arm” bill, indicates the definition of nexus will reach the maximum extent of federal law. Those three bills were presented as one trailer bill under the heading ABX1 28 and signed by the governor on June 28.

Retailers resisted. Amazon.com, with both in-state affiliates and subsidiaries (Kindle manufacturing and research, for example), claimed the new laws are unconstitutional, pointing to a 1992 Supreme Court decision in the case of Quill Corp. v. North Dakota. Legislative aide Blanco says that decision was outdated, considering it occurred “prior to any substantial internet commerce.” But Amazon fought more, even gathering signatures for a referendum. Plus, in a crippling move, Amazon and other out-of-state retailers severed ties — and cash flow — with thousands of California small businesses that acted as their in-state advertising affiliates.

“Amazon, along with these other 800 to 1,000 out-of-state retailers, said, ‘Well, if just running an ad means we have to collect use tax in California, we’ll just stop running ads in California.’ And that’s what they did,” says Rebecca Madigan, executive director of the Performance Marketing Association.

Madigan says 25,000 small businesses are affiliates of out-of-state retailers. A survey conducted of those affiliates indicates that as a result of the out-of-state retailers rescinding their dollars, 35 percent of affiliates lost more than half of their income, 20 percent shut their affiliate programs and 32 percent moved their business out of state altogether. About 10,000 of those businesses are Amazon.com affiliates.

“We were dropped by about 10 or 12 different companies that we work with,” says Wessels. “Of course, Amazon was one of the main ones.”

She and her husband operated The Frugal Find, a couponing website reaching 100,000 unique visitors a month, and raised their four children out of their Antioch home. Within hours of ABX1 28’s passage, she knew that had to change. “About three or four hours later, we got the email that (the bill) was signed into effect and effective immediately,” she says.

Wessels says she lost 40 percent of her income. That weekend, instead of vacationing for their 10-year anniversary as planned, Wessels and her husband found a new home in Bend, Ore., where their business would not be subject to repercussions from the Amazon tax.

“It kind of all happened very quickly,” she says. “But we also knew we needed to make a decision quickly because effective that day we were cut off.”

Monique Bell’s small business in Stockton was hit so hard she almost packed her bags as well. “It’s become a hostile business environment,” she says.

On her shopping websites, one for My Kid Sister Clothing Co., she links to other websites such as Amazon.com or ChristianBooks.com for customers to make purchases. Bell says she lost 30 percent of sales when the law passed because retailers told her she could not post links or sell items from their websites.

“It’s disheartening when we’re already in a tight economy, and you’re already struggling,” she says. “It was just a big slap in the face.”

Wessels and Bell also say they doubt the law would increase purchases made at brick-and-mortar stores as legislators hoped. Bell says the rise of convenient e-commerce has shifted how the public buys goods. Wessels agrees. “People are never going to stop shopping online,” she says.

Board of Equalization member George Runner also opposed the legislation, saying he anticipated the bloodshed among affiliates. In a statement, he calls the laws “botched efforts to compel out-of-state retailers to serve as California’s tax collectors.” He says the projected benefits of the legislation are “oversold,” and regulation efforts would be complicated. So when lawmakers proposed an option to temporarily repeal the tax law, Runner penned a letter of support.

On Sept. 23, Gov. Brown signed the new bill AB 155, the Amazon Compromise, to delay implementation of the tax law for one year. Amazon dropped the referendum and vowed to work with legislators and retailers to achieve a national e-commerce tax collection law. If no federal solution is reached, the law would go back into effect in September 2012. 

State legislators and retailers have hailed passage of AB 155 for crossing party lines and uniting the interests of lawmakers and large corporations for the benefit of the state’s budget.

Paul Misener, Amazon’s vice president for global public policy, said at a news conference that over the next few years Amazon subsidiaries would bring 10,000 new jobs to the state and $500 million in capital investment. With Amazon bringing more traditional nexus to the state, the assumption is that their 10,000 affiliates would be reinstated for good.

The outlook for the state seems brighter with Amazon on board, but the tug of war for California businesses is far from over. Brick-and-mortar storeowners still feel the pinch, while affiliates are temporarily spared.

Knickerbocker is waiting to see the level playing field supporters hoped the Amazon law would achieve in the first place. “I look forward for (the tax law) to be implemented,” says Knickerbocker, whose projected 30 percent boost to business has been delayed at least a year.

In the meantime, affiliates — tugging furiously at their end of the rope — are expected to regain cash flow for now. Bell says she has “renewed hope,” but affiliate advocates such as Runner say that hope has an expiration date. He projects it won’t be long until the tables are turned once more, and affiliate small businesses will be sacrificed to help the brick and mortars.

Runner claims the compromise law means Amazon affiliates should be safe, but it is “by no means a cure-all.” Doubting a national solution will be reached in time, he says the abiding 15,000 affiliates remain vulnerable if the law goes back into effect in September 2012, as Runner believes it will.

“Overstock.com, for example, is still going to sell into California,” he says. “They’re just going to let go of their affiliates again.”

Madigan shares Runner’s fears for the future of California affiliates. “We would ideally ask for a full repeal of the affiliate nexus tax,” she says.

Small businesses can’t hold on forever, though.

 “Absent a federal solution,” Runner says, “which is highly unlikely in such a short time frame given all of the competing interests, we’ll be right back in the same mess in a year.”

 

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