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California leads way in putting Amazon in its place

A key mechanism of Amazon's business model, which was to exploit the price advantage it gained by not collecting sales tax, is beginning to come apart, in no small degree because of California.

October 23, 2011|Michael Hiltzik
  • California Gov. Jerry Brown, center, talks last month with Assembly speaker John Perez, right, and others before signing a bill that requires Amazon.com and other Internet retailers to collect sales taxes starting next year.
California Gov. Jerry Brown, center, talks last month with Assembly speaker… (Jeff Chiu, Associated Press )

California's role as a pioneer of crucial social, political and technological movements — the Internet, clean air standards, property tax reform, Lindsay Lohan case law — is part of the legacy we teach our schoolchildren.

In that context, it's not too early to ponder the state's role in putting Amazon.com in its place, even though the ink is not quite dry on the deal signed by Gov. Jerry Brown last month requiring the giant online retailer to collect sales tax on purchases by its California customers.

The settlement shut down a potentially ugly fight that started when Brown signed a bill finding that the company's physical presence within the state was sufficient to require it to collect sales tax, then was escalated by Amazon's launching of a campaign to place a repeal referendum on the June 2012 state ballot.

The company backed up its threat with a $5.25-million fund for signature-gathering and other purposes. The original bill was designed to comply with a 1992 U.S. Supreme Court decision holding that a state couldn't force a business to collect sales tax unless the business had a physical presence, such as a store or office, within its borders.

The deal pushes off Amazon's duty to collect California sales tax until next September, unless Congress passes a bill simplifying sales taxes nationwide first. (Don't hold your breath.) That means the loss of one year's revenue, which has been estimated at $200 million.

In return, Amazon has dropped the referendum and made an informal commitment to open two distribution centers, or warehouses, and create about 10,000 jobs in the state.

The key question, of course, is who won? I've been thinking about that lately, because the outcome of the battle of California has been resonating in the halls of Congress and statehouses across the country.

"The tide is turning, a little," Michael Mazerov, who has followed the issue for the Washington-based Center on Budget and Policy Priorities, told me. "Will Amazon throw in the towel? It's too early to say."

What's clear is that a key mechanism of Amazon's business model, which was to exploit the price advantage it gained by not collecting sales tax from its customers, is beginning to come apart, in no small degree because of California.

Since bricks-and-mortar retailers as well as some of Amazon's online rivals collected the tax at the point of sale either by law or voluntarily, the difference could come to as much as 10%. (Among Internet-only retailers of general merchandise that haven't been collecting sales tax in California, Amazon, with $34 billion in sales in 2010, is the big dog by a huge margin; the next biggest, according to the marketing website Internet Retailer, appears to be L.L. Bean, which owns retail stores and outlets mostly in the East and had $1.4 billion in sales in 2010.)

"We won," says Lenny Goldberg of the California Tax Reform Assn., who supported the compromise. He observes that if Amazon had placed its referendum on the June ballot, the law Brown signed would have been suspended at least until the vote — and repeal would have been a real possibility. In other words, the compromise gained Amazon little more than three additional months free of collecting, while removing the threat that the law would be overturned.

And what of that promise of warehouses and jobs? Although new jobs and construction aren't to be sneezed at in today's crummy economy, these will likely be low-wage positions.

Moreover, to maintain its reputation for speed and efficiency Amazon eventually would need expanded distribution facilities in California, its largest domestic market, no matter what.

California's agreement has led other states to reconsider the sweetheart deals they offered Amazon on tax collection in the past, when the company insisted on exemptions in return for the construction of in-state warehouses and hiring of hundreds or even thousands of workers. In Tennessee, for example, former Gov. Phil Bredesen, a Democrat, quietly cut a deal to exempt the company from collecting sales tax as part of a deal to attract at least two distribution centers that Amazon had threatened to build across the state line in Georgia. How quiet was this arrangement? State officials aren't even sure if it was set down in writing, as opposed to being a "handshake deal."

This month, Bredesen's Republican successor, Bill Haslam, announced a revised deal under which Amazon will start collecting sales taxes from its Tennessee customers starting in 2014 and will even step up hiring. As another sign of how the landscape has shifted, Haslam's deal has evoked angry reactions from Tennessee lawmakers and retailers asking why Tennessee has to wait two years longer than California for Amazon to start collecting.

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