Will California force E-commerce companies into an antiquated sales tax system or lead the way in creating a simple and fair tax system for the 21st century? California Gov. Gray Davis will decide in the coming weeks.
The U.S. Supreme Court has ruled states cannot force an out-of-state retailer to collect sales tax on the state’s behalf. That’s why bookstores on Main Street collect sales tax, but online retailers like Amazon.com do not.
In order to compete with out-of-state retailers like Washington-based Amazon, it is alleged that some companies with bricks-and-mortar locations in California have set up separate out-of-state dot-com subsidiaries.
A bill approved by the California Legislature would require out-of-state affiliates or subsidiaries to collect sales tax if they share a similar name, similar product line, or similar ownership with a company that has bricks-and-mortar stores in California. Even if Corner Bookstore Inc. and CornerBookstore.com are separate legal entities, the legislation would require out-of-state CornerBookstore.com to collect sales tax on California’s behalf. Ignoring corporate legal entities in this context has potential repercussions in other areas, some to the detriment of the state.
Simplify, Don’t Complicate
Supporters of the bill say it levels the playing field between bricks-and-mortar bookstores and dot-com affiliates and subsidiaries. However, all are disadvantaged when compared to out-of-state Amazon. The bill is an attempt to put a band-aid on a larger problem.
The bill, California Assembly Bill 2412, tries to shoehorn these out-of-state affiliates into California’s antiquated sales tax law. A better solution is radically simplifying a complex sales tax system that favors one business model over another. Simplification is a universal goal being sought by most other states; this bill would have California acting unilaterally.
E-commerce retailers face a much higher sales tax compliance burden than their in-state competitors. They are doing business in 50 states, 46 of which impose state sales taxes. But there are no less than 30,000 separate taxing jurisdictions, none with similar laws or definitions of what is taxable. The Corner Bookstore on Main Street only needs to know the tax rate in one location, and sends the sales tax collected to only one government agency. An E-commerce seller would need to collect sales tax at different rates based on a customer’s address, and then remit that sales tax to thousands of different state and local governments.
This complicated reality is what led the Supreme Court to step in and set out the current rules protecting out-of-state retailers. The only long-term solution is to develop a sales and use tax system that is simpler and fairer for all sellers, both in-state and remote, to administer.
Dot-Com Exodus?
The worst consequence of AB-2412 is that a dot-com company would be wise to move all of its operations out of California. The only companies that would be free of California’s sales tax grasp would be those unaffiliated with any company that has employees, warehouses, or retail stores in California. As consolidation continues in the E-commerce marketplace, the incentive will be to locate outside of California.
The constitutionality of AB-2412 is in serious doubt. The Legislature has approved the bill, and Gov. Davis has 30 days to sign or veto the measure. If the governor signs the bill, the state will be required to defend the constitutionality of the law in court. High-tech companies would rather see the state’s money and energy go toward simplifying the sales tax system instead of defending constitutionally dubious bills in court.
California industry leads the world in innovation. California government should be a leader in casting off a tax system that desperately needs to be updated to work in the age of the new economy. Building a fair and simple tax system for the 21st century makes sense for all interested parties.
Casazza is vice president of California public affairs for the American Electronics Association in Sacramento.
