Online retailer Amazon has agreed to start collecting sales tax on items sold in California in one year’s time, unless Congress passes new rules on the issue. California lawmakers approved a bill on Friday that allows the one-year delay and sent it to Gov. Jerry Brown, who’s expected to sign it.
The bill ends a summer-long battle between the $34 billion Seattle-based retailer, which has fought attempts to collect sales taxes in states where it has no physical presence, and California Democrats, who are determined to boost state revenue.
While federal law says online sellers don’t have to collect sales tax in states where they do not have a “physical presence” – usually interpreted to be brick-and-mortar stores – this summer California expanded the definition to include marketing affiliates, which steer online customers to the retail site, and sister companies such as Amazon's Silicon Valley subsidiary that developed the Kindle electronic book reader, The Associated Press reports.
Amazon resisted, dropping its 10,000 California retail affiliates and spending $5 million to collect signatures to take the matter to voters in a referendum next June.
In return for the one-year tax-collection delay, Amazon will abandon its referendum campaign. It’s possible that the company will use the time to move subsidiaries out of the state so it could argue that it no longer has any physical presence in California, the New York Times reports.
According to the San Jose Mercury News:
With hard times cutting into state budgets and traditional retailers' balance sheets, a growing number of states have been eyeing the Internet and catalog retail industry – with some 16,000 companies driving $235 billion in sales – as a source of lost revenue. Closing the online sales tax loophole could deliver $23 billion in additional tax revenue to the states, according to Americans for Tax Reform.
California is a latecomer to the close-the-loophole party. New York required online retailers to collect sales tax four years ago, and Amazon has been collecting the levies and putting them in an escrow account while battling the Empire State in court. States such as Illinois, Arkansas, Connecticut, North Carolina and Rhode Island have taken similar steps, and even low-tax Texas is toying with the idea.
Amazon currently collects sales taxes in North Dakota, Kansas, Kentucky and Washington.
The deal with California might inspire other states to take steps to close their own online sales tax loopholes, Robert W. Wood, a tax lawyer in California, told the New York Times. “Other states needing money will look and say, ‘It wasn’t a smooth process, but California is going to come out ahead,’ ” he said.