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Capitol Journal: California must enforce 'use' law — now

California retailers can't compete against e-tailers that charge no sales tax, and the cash-strapped state is losing out big time in revenue as a result. Time to enforce the 'use' tax.

March 24, 2011|George Skelton | Capitol Journal

Recently I bought a small TV set after trudging for what seemed like 40 miles through Wal-Mart. The price was OK: $158 plus an $8 recycling fee and $13.83 sales tax.

A colleague bought a similar TV while sitting comfortably at his desktop computer and clicking onto Amazon.com. The list price was roughly the same as mine. But there was no add-on fee or sales tax. Not even a delivery charge.

How do California retailers compete against that? Increasingly, they can't. It's tough enough when your customers have to navigate parking lots and expend shoe leather. But when a rival can also offer tax-free merchandise, that's plain unfair.

Actually, my colleague does owe a "use" tax on the TV. The sales and use tax are one and the same. The sales tax is collected by a merchant and forwarded to the state. If it isn't collected, the consumer still owes the tax if he uses the merchandise in California. That has been the law since 1935.

But I'm not going to turn in the guy or bug him. The use tax isn't enforced on consumers unless they're buying a car or a boat. And it's defying human nature to expect people to voluntarily hand over money unless there's a penalty for keeping it in their pockets.

If government wants the money badly enough — and these days it certainly should — it needs to aggressively go after the tax itself.

And that raises the question: What are Gov. Jerry Brown and the Legislature waiting for? There's a $26.6-billion budget hole to be filled, and lawmakers have approved plans for plugging less than half.

I mean, regardless of whether you favor raising taxes — regardless of whether you support the governor's plan to extend higher income, sales and vehicle levies for five more years — at least we should all agree that taxes already owed should be collected.

It puzzles me why there isn't an uproar in the state Capitol about the revenue need and the fundamental fairness of forcing e-tailers such as Amazon to tack the sales tax onto their customers' bills.

There does seem to be some lukewarm enthusiasm for the idea and legislation is crawling, but Brown has not taken a position.

This is Assemblywoman Nancy Skinner's third year chasing e-tailers. The Berkeley Democrat is pushing a bill similar to one that Gov. Arnold Schwarzenegger vetoed two years ago. She thinks prospects are improving.

"This is the first year where California businesses are on board," she says. "We've got the wholesale support of big retailers and small mom-and-pops. California businesses are finally fed up."

Bill Dombrowski, president of the California Retailers Assn., says, "It's a competitive issue we can't allow to continue. The battle's on. It's going to happen. And eventually Washington, D.C., is going to have to do something."

It is a growing national problem that several recession-plagued states — New York, Illinois, Texas and Colorado, among others — have been fighting.

Federal law requires e-tailers and mail cataloguers to collect sales tax only if they have a physical presence in the state — a nexus — such as a traditional brick-and-mortar store or a warehouse.

New York found a way around the law, and so far it has survived court tests. Skinner's bill, which on Monday cleared its first committee, is patterned after New York's law. It would redefine physical nexus to include a dot-com's "affiliates" — website operators that provide a link to the e-tailer — in return for a commission on sales.

Amazon and e-tailer Overstock.com are fighting back through George Runner, a Republican member of the state Board of Equalization, which administers the sales tax. Both have written him that they'll unload their California affiliates if the Skinner bill is enacted.

"There are as many as 25,000 Internet affiliate businesses in the state that could be wiped out by this bill," Runner says. "The bill simply won't work. Out-of-state retailers will cut ties with their California affiliates and continue selling to California consumers."

He says California affiliates paid $124 million in state income taxes in 2009.

So be it. Holding affiliates hostage in a desperate effort to continue tax-exempt merchandizing shouldn't be condoned. Barnes & Noble, which does collect the sales tax, has offered to pick up some of the Amazon affiliates. Other online retailers could, too.

If the tax-free e-tailers retained their affiliate marketers and began collecting the taxes, Skinner estimates, her bill would net between $250 million and $500 million annually for the bleeding state general fund.

But California this year will be stiffed much more: $1.7 billion in taxes that should have been paid on Web purchases, according to a University of Tennessee study.

Another bill, by state Sen. Loni Hancock (D-Berkeley), would grant the Board of Equalization more power to force tax collections. She estimates it could gain the state more than $1 billion annually.

A key backer is Democratic equalization board member Betty Yee.

"Amazon used to argue that it didn't have the capability to collect the taxes, given the various different tax rates," she says. "They can track individual consumer preferences about products but can't track sales taxes? That's kind of crazy."

Runner says, "The only way to solve this problem is with a national solution. You can't do it piecemeal."

Perhaps. But a lot of California retailers could fold before the feds ride to their rescue. Meanwhile, deficit-plagued states are denied the taxes they're owed.

Sacramento politicians should move swiftly to protect local businesses and demand the state's legal share. They should get off their inertia.

george.skelton@latimes.com

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