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California legislation would tighten rules on Internet sales tax

California lawmakers are pushing measures that would require online merchants to collect sales tax on more transactions in a move to help shore up the state's sagging finances and level the playing field for bricks-and-mortar retailers.

February 27, 2011|By Marc Lifsher, Los Angeles Times
  • Workers push carts full of merchandise at the Phoenix Fulfillment Center.
Workers push carts full of merchandise at the Phoenix Fulfillment… (Joshua Lott, Bloomberg )

Reporting from Sacramento — Mindy Benham knows how to pinch a penny.

That's why the Costa Mesa resident does a lot of her shopping on the Internet. She particularly favors Inc. because the giant e-retailer doesn't collect California state sales taxes on her purchases.

"There's something about Milwaukee, where I'm from, that people take pride in how little they pay for something," said Benham, a magazine art director, who recently bought a pair of eyeglasses and a sofa online. "I don't want to pay taxes on something if I don't have to pay taxes. If I can save a couple of bucks, I'll do it."

Benham's frugal ways are shared by millions of shoppers nationwide, whose enthusiasm for tax-free Internet purchases has driven up e-commerce sales 300% over the last eight years. In-store purchases rose about 120% in that time.

That tax-free ride, though, could be running out of gas.

For the third time in three years, California lawmakers are pushing for legislation to make it harder for Internet sellers to avoid collecting sales taxes, and prospects for getting it passed are stronger than ever.

Passing the bill is a question of "e-fairness," said Assemblywoman Nancy Skinner (D-Berkeley), who is sponsoring one of several Internet sales tax bills.

It also would put an extra $300 million into the state's depleted coffers in its first year as a law, Skinner said, and would add California to the growing group of states creating their own Internet sales tax rules.

"Out-of-state online retailers designed their business model to avoid collecting sales tax," she said. "This puts our Main Street businesses, which play by the rules, at a competitive disadvantage. It's not fair to hurt California businesses that are struggling to keep their doors open."

Rosemary Rodd, owner of Leo's Professional Audio in Oakland, said her retail prices for high-tech mixing boards, synthesizers, speakers and guitars are as low or lower than the best Internet deals — before taxes.

But because her online competitors don't collect sales tax and often provide free shipping, they are able to undercut her by nearly 10%.

"We get people who come in here and try the thing out and talk to my people about what works best for them," Rodd said. "Then they buy it on the Internet and tell me, 'I'm a musician. I'm broke. The $200 I saved was just too much.' "

What's more, she noted, out-of-state competitors don't support local charities or help pay for police and fire protection, schools, road repairs and other government services.

Skinner's bill, AB 153, is based on a 2008 New York law that so far has survived court challenges. New York is leading more than a dozen states' efforts to put retailers that sell through clicks online on a level playing field with those that sell through bricks and mortar.

Some states refer to proposed legislation as "Amazon bills" because Amazon, the Internet's biggest retailer with $13 billion in revenue in last year's fourth quarter, has opposed state sales tax collection measures.

Amazon and other Internet sellers have argued that the New York law violates the U.S. Constitution's commerce clause, which gives Congress the power to regulate commerce among the states, as interpreted by a 1992 U.S. Supreme Court decision.

The court ruled then that it would be too burdensome to require out-of-state retailers to collect sales taxes, except in states where they have a "physical presence," such as a store, warehouse, marketing call center or office. Since then, Congress has failed to come up with a uniform sales tax plan that could be applied nationwide.

Skinner's proposal is supported by major corporations, including Wal-Mart Stores Inc., Target Corp., Best Buy Co. and Barnes & Noble Inc., as well as thousands of small bricks-and-mortar businesses, such as independent bookstores and clothing boutiques.

"This is not a new tax. It's a collection issue," said Bill Dombrowski, president of the California Retailers Assn.

Opponents also are a formidable lot. They include major online retailers Amazon, EBay Inc. and Inc., as well as about 25,000 affiliated website marketers that earn commissions by referring sales to the big online retailers. Those affiliates attract potential business by offering discounts and other deals when viewers click on icons to go to retail sites.

"To try to force a marketer not located in the state to learn the tax rates for 7,500 jurisdictions within the United States would constitute a burden on interstate commerce," said Jerry Cerasale of the Direct Marketing Assn., an Internet, television and catalog sales trade group.

Opponents contend that any effort by California to tax Internet sales would backfire by harming small, start-up Internet companies — mainly, those affiliate marketers.

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