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Are you an online tax cheat?

Just because you shop online doesn't you mean that you don't owe California taxes.

March 22, 2011

Some California Democrats are trying again to get Internet retailers such as Amazon to tack state sales taxes onto the price of online purchases, and some California Republicans are again warning that collecting these longstanding and lawful taxes will have disastrous consequences. We'd like to see the millions -- perhaps billions -- of dollars in sales and use taxes owed by sometimes unaware California shoppers get collected, and we're tired of arguments by supposed law-and-order conservatives against collecting lawfully owed taxes.

At issue is proposed legislation by Assemblywoman Nancy Skinner, a Democrat representing Berkeley and other East Bay communities. Skinner's bill, much like a 2009 predecessor vetoed by then-Gov. Arnold Schwarzenegger, would require online retailers to collect taxes and remit them to the state in many cases just like their brick-and-mortar competitors do.

And why not? Contrary to popular lore, retail sales of books, shoes, clothing or anything else do not magically become tax-free just because the transaction takes place on a laptop or a smart phone. If you have to pay 9.75% in sales tax when you buy a pair of designer shoes at Discount Shoe Warehouse on Ventura Boulevard, you have to pay the same 9.75% when you buy the same shoes online from Nevada-based (and Amazon-owned) Zappos. It's only fair, and more to the point, it's the law.

The misunderstanding comes into play because of differences in the way the taxes are collected. At the boulevard shoe store, the retailer adds on the tax, collects it and remits it to the state. At the online store, the retailer winks, looks the other way and leaves it to the buyer to add up the tax owed and send it in to the state Board of Equalization. And how many Californians do that? How many Californians even know they are supposed to? How many have even heard of the Board of Equalization? Our guess is not many. Even among those who know, it's a good bet that most don't bother with the taxes because they can get away with not paying them or because figuring out what is owed and how to pay it is too difficult.

There's a reason the taxes are not collected. In 1992, the U.S. Supreme Court ruled, in the landmark case Quill Corp. vs. North Dakota, that out-of-state mail-order catalog sellers could not be required to add or remit state and local sales taxes, because under the commerce clause they don't have a sufficient "nexus" with the state to be under its tax jurisdiction. In most states, like California, the tax is still owed, but it's up to the buyer to calculate it and send it in. Most online sellers argue that the rule for catalogs also applies to e-commerce.

Online retailers assert that they are not trying to exploit an unfair advantage over local companies by letting shoppers believe that no taxes are owed, or colluding with them to avoid taxes. But that argument is balderdash on its face. If the Amazons of the world really wanted shoppers to know that they have to pay taxes, they'd include a statement at e-checkout (upfront, not several asterisks and clicks away) telling them to find out from their state and local authorities about adding up and paying the tax. Most are only too happy to promulgate the notion, wordlessly and falsely, that tax obligations dissolve in cyberspace.

Now, as more shoppers abandon Main Street stores for online sellers, governments get less of the revenue that used to pay for schools, police, street repair and other services. We have no problem with the shopping revolution that came with the Web; if online sellers are better and cheaper than local shops, so be it. Competition is good. But a business model based on avoidance of taxes is not competition. It's cheating.

That brings us back to Skinner's bill, which is premised on the argument that sellers create a sufficient nexus to California for tax purposes when they affiliate with companies physically located in the state. It would be enough for a shopper to click on an online ad, placed by a California-based intermediary, that sends the shopper to a site operated by an out-of-state company.

Critics point out that California has developed a thriving industry of online intermediary companies. If Skinner's bill is adopted, Amazon and others have threatened to sever ties with such affiliates, driving them out of business or at least out of the state. Jobs could disappear, and with them, tax revenue.

That's a valid point. But the Skinner bill, if passed and signed into law, would force the issue. Even though the bill would only bring in about $300 million, a fraction of the estimated $1.7 billion California loses each year, California has more online buyers than other states that have passed similar laws, and could pave the way for states that so far are still considering it.

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