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Amazon fights California sales tax requirement

Amazon seeks to avoid collecting sales taxes from California consumers by cutting ties to affiliates in California who steer business to its site.

July 01, 2011|By Marc Lifsher and Andrea Chang, Los Angeles Times

Reporting from Sacramento and Los Angeles — Saying it won't force California customers to pay sales tax on their Internet purchases, Amazon.com is severing ties with 10,000 small businesses and individuals here who funnel shoppers to the online bazaar through their websites.

The defiant action came hours after Gov. Jerry Brown signed legislation that would have required Amazon to start collecting a 7.25% base tax on online purchases Friday because it has affiliates here that are paid commissions for steering shoppers to its website. Previously, only Internet companies with stores or operations in California had to collect the tax.

"This legislation is counterproductive and will not cause our retail business to collect sales tax for the state," said Paul Misener, Amazon's vice president of global public policy.

He wouldn't say whether the company would sue to overturn the law, as it has in New York, where its case is pending. But California officials said they expect Amazon to file suit.

"It's a huge fight," said Betty Yee, a member of the state Board of Equalization, the agency that collects sales tax. "We are the biggest customer marketplace for Amazon and other online retailers."

California merchants say Amazon and other online-only retailers have an unfair advantage because consumers can effectively get a nearly 10% discount by buying online.

That discount has helped Amazon thrive at a time when many brick-and-mortar retailers are struggling. Seattle-based Amazon racked up $34.2 billion in sales last year, up from $24.5 billion in 2009. Its stock is up nearly 14% this year, compared with just 5% for the broad Standard & Poor's 500 index of blue-chip companies.

Supporters of the legislation signed by Brown on Wednesday say Amazon's sales model denies the cash-strapped state treasury and local governments about $317 million a year in tax revenue. Taxable online sales in the state are more than double those of any other state.

At least five other states also have laws forcing Internet retailers to collect sales taxes for them, and many others are considering similar legislation.

Amazon is the largest of the Internet sellers who combined do business with about 25,000 affiliates in California who steer business their way. They range from one-person blogs to small and mid-size companies that employ scores of workers.

The much smaller Overstock.com also said it had severed ties with "hundreds" of its California affiliates to avoid collecting taxes.

One of the affiliates cut off by Amazon is Savings

.com, a West Los Angeles-based website that helps shoppers find bargains.

"This is a significant hit on our revenues and our profits," said Loren Bendele, chief executive of the company, which has 80 employees. Bendele said the action would cost the company 15% to 20% of its business, and probably require him to lay off workers.

Another affiliate, David Wolf, said the money he made from Amazon wasn't a lot — usually no more than $100 a month — but he used the extra income to pay for his cable or phone bill.

"If this is the way it goes, I'm concerned that other affiliate programs will go away too," said Wolf, who works as a Web designer from his Corona home. "And then I'll have to look for another source of income to fill the gap. It is real money."

But Larry Darnell, who sells guitars and artworks on the Internet from his home in the Santa Cruz County town of Felton, said he believes Amazon should collect sales tax.

"I don't think they're a particularly good corporate citizen," said Darnell, who like other affiliates was cut off by Amazon. "We all live in the system and contribute to the state, and they don't want to do it. Quite frankly, the money the state is going to acquire is not too much, but every little bit helps."

Despite Amazon's assurances that it would not begin to collect sales tax, some shoppers were closing deals Thursday instead of risking having to pay the 8.25% state sales tax, which was lowered Friday to 7.25% after a temporary increase expired.

During a break from her job at a commercial real estate brokerage in Costa Mesa, Rebecca Thelin was on Amazon searching for a portable Weber barbecue grill that she was planning to buy that day to save on sales tax.

"It's not that big of a deal for DVDs or books, but a barbecue costs more," said Thelin, 32, of Foothill Ranch.

Yee of the Board of Equalization asserted that Amazon severing the ties with affiliates wouldn't be enough to get it off the hook for collecting sales tax.

For example, she said, Amazon still has a research lab in Cupertino that develops Kindle e-readers and other offices in California of other related business entities. That presence in the state might make it liable under the new law to collect sales taxes.

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