Will AB 153 mean sales tax on Kindle books in California?

Will AB 153 mean sales tax on Kindle books in California?

California is in trouble. 

Okay, pretty much everybody is in trouble…well, not Amazon or Apple.  ;) 

But governments?  California is (or was?) the eighth largest economy in the world.  Newly re-elected Governor Jerry Brown has reaffirmed what the previous governor Arnold Schwarzenegger had said: the state is in a financial crisis.  It’s an official declaration: it means lawmakers have 45 days to do…something.  If they don’t, they get prohibited from doing other things they want to do…like not being allowed to go outside and play before you finish your homework.  ;)

What can they do?

Cut costs and/or raise revenue.

Unlike a lot of politicians, Governor Brown is clear that raising taxes is one of the possible ways to do that.

Which taxes?

Income taxes are not a great way to go…they’ve dropped as a source of revenue, partially due to unemployment.  California’s unemployment rate in November (seasonally adjusted) was 12.4%.  That’s tied with Michigan for second worst (after Nevada’s 14.3%).  By contrast, New York, another economic powerhouse, was at 8.3%.  California’s historically worst unemployment rate was only two-tenths of a percent higher…and it was also in 2010.

While California has a lot of rich people (5.28% of our people are millionaires…that’s only ranked #9, though.  Alaska has a higher percentage, higher median income.)  Yes, California has more millionaires…but that’s because we have a lot of people.  We have a lot of expenses, too.

So, income tax is not a really good place for us to go to raise money.

Rounding up the usual assets brings us to…sales tax.

People who buy more expensive items pay more sales tax.  The well for sales tax doesn’t run dry.  Buy a $100,000 TV set, you are going to pay a lot of sales tax.

People of fewer means need to pay sales tax, too, of course.  Raising the rate overall isn’t popular.  It’s big news: we know sales tax is pretty likely to never go back down, for one thing.

Try to raise the sales tax rate, and the stores (and the economists) will tell you that it’s bad for retail sales.

So, you try and collect sales tax where you haven’t been getting it before, but at the same rate.

Here’s where it gets interesting.

People buy stuff on the internet…an increasing large amount of stuff.  Many people see the prices as significantly better on the internet, because they don’t pay sales tax (they still owe it…see below).  Especially when there are free shipping deals (such as are common during the crucial holiday period), shoppers may skip the local stores and go online.

States can’t tax sales that happen in other states.  That’s because of what’s commonly called the “Commerce Clause” of the United States Constitution (Article 1, Section 8, Clause 3). 

While there is a lot of argument over interpretation, it essentially says that the power to tax interstate business belongs to the federal government, not the states. 

What can states do? 

They can do everything they can to define a sale as having taken place in their states. 

Here’s where it is key.

I’m in California.  When I buy from Amazon (in Seattle, with the product maybe shipped from Kentucky), the sale is considered to have taken place in California.  I owe sales tax on it to the state of California.

However…

California can’t compel Amazon to collect the sales tax on it, unless Amazon has a presence (a “nexus”) in California. 

That’s right…I owe it whether or not Amazon collects it. 

That’s a commonly misunderstood part of this.  The state can tell me that I owe the taxes, but they can’t tell an out-of-state company to collect it.

If the company selling it to me doesn’t collect it, how am I supposed to pay it?

On my annual state taxes…the same time I pay my state income tax.

I do that…I actually go back through my internet purchases for the year, and if sales tax wasn’t collected (it will be if the company is in California), I pay a not inconsiderable lump sum.

That’s not as good a system for California (and other states).  Many, probably most, taxpayers simply don’t do it.  California doesn’t know what I bought from Amazon last year…Amazon doesn’t have to report it to them.

That’s because Amazon doesn’t have a physical presence in California.

A physical presence could be a building…but it could be a “sales force”.

Enter what are called “Amazon laws”.

That’s a slang term, but it basically refers to states trying to make e-tailers collect sales tax for sales in their states and send it to them.  Collecting it, as you can imagine, is expensive.

Here’s one way to define that Amazon is doing business in your state.

I’m an Amazon Associate, as I’ve told you before.  I user “referrer links” in these posts.  If you buy something from Amazon because you got there through my link (depending on what it is), Amazon pays me.  They don’t charge you anything more for it.   It’s basically advertising. 

What some states have tried is saying that I (and other Associates) are part of the Amazon sales force, just as if I worked for Amazon.  If Amazon had employees to sell their products based in California, the state could then compel them to collect that sales tax.

“Amazon laws” try to make that statement.

Assembly Bill 153

dated January 18 2011, seeks to amend Section 6203 of the Revenue and Taxation Code. 

The official Legislative Counsel’s digest includes this:

“This bill would include in the definition of a retailer engaged in business in this state any retailer entering into agreements under which a person in this state, for a commission or other consideration, directly or indirectly refers potential purchasers, whether by an Internet-based link or an Internet Web site, or
otherwise, to the retailer, provided the total cumulative sales price from all sales by the retailer to purchasers in this state that are referred pursuant to these agreements is in excess of $10,000 within
the preceding 12 months, except as specified.”

In other words, Amazon having Associates in California would define them as doing business in California, and they could be compelled to collect sales tax.

This isn’t likely to get signed into law, in my opinion, but let’s say it was.

Would that mean that sales tax would be collected at the time of sale on Kindle book sales to California residents?

Nope.

Why not?

Currently, California doesn’t tax e-books delivered electronically.  They would tax e-books delivered on a CD or other physical medium, but they don’t put sales tax on an intangible like that. 

That could change, though.  Again, I think that’s unlikely: it would mean they could do a sales tax on the rent you pay, for example. 

What about taxing Kindles themselves, or accessories, like covers or lights?

Yes, it could mean that.  Remember that you already owe that tax…the difference would be whether Amazon has to collect it or not. 

California wouldn’t be the first state to do it.  Colorado did…and Amazon responded by cutting off the Associates program in Colorado.

That doesn’t seem like a good solution.  Many people make hobby-level money by being an associate; some make more.  Non-profit organizations with links to Amazon items on their websites?  They are often getting those referral fees. 

Those Associates in Colorado were hurt by cutting off the program.

Importantly, the state was hurt as well.

Those fees are taxed. 

Colorado did not get to force Amazon to collect sales tax on sales to Colorado, if there wasn’t an Associates program there any more.  The Associates stopped getting that income.  Colorado lost the income taxes from those sales.

Amazon, of course, lost sales.  Presumably, they make a profit on those sales…more than the cost of paying the Associates.  However, it might not be more than the impact of collecting the sales tax, which has administrative costs and cuts down their competitive advantage.

I don’t think this bill will become law…but if it does, it could be a net loss for California.

What do you think?  Feel free to leave a comment to let me know…and you might want to let your legislators know what you think about this bill as well.

Huffington Post article on Amazon dropping Colorado Associates

Bureau of Labor Statistics Current Unemployment Rates for States and Historical Highs/Lows

This post by Bufo Calvin originally appeared in the I Love My Kindle blog.

About these ads

11 Responses to “Will AB 153 mean sales tax on Kindle books in California?”

  1. tuxgirl Says:

    I’m pretty sure that if the bill did get signed into law, Amazon would immediately drop the associates in california. There are a ton of people in california, and my guess would be that californians buy a lot from Amazon. Risking that would be a bad business decision.

    What I think would be a better decision from California’s side (and whatever other states might be willing to consider this) would be to adjust laws to give Amazon (or any other big company) reasons to move into California. That would stimulate their economy and create jobs. Isn’t that better than getting tax revenue?

    • bufocalvin Says:

      Thanks for writing, tuxgirl!

      Thoughtful as always. :)

      There is a possibiity that California associates are more valuable than ones in other states…but I don’t know if that will offset the costs of collecting sales tax. Why might California folks be more valuable? They may influence more sales. When a link appears in a blog like this one, it affects more than just the people who click-through…it also affects people who see the story, and buy it through another channel. California may have people who get a wider population exposure.

      California is not particularly friendly to businesses…at least, that’s the rep. You attract businesses by giving them tax breaks and fewer or less strict regulations….California isn’t particularly good at the latter. ;)

  2. Man in the Middle Says:

    The Illinois legislature appears to have just passed a similar tax bill. Amazon recently notified its Illinois associates that if the bill is signed, Amazon plans to immediately cancel its relationships with Illinois associates.

  3. Terri Says:

    i think oklahoma did that too… there was a comercial on the TV here a few weeks ago that said we’re supossed to pay a “use sale tax” (i think thats what they called it?) on items purchased online. i had no idea till this year. i did go through and write down what i purchased on amazon for 2010 but i havent gone through and figured out what my total would be though. i’m kind of scared to find out. i do think that it will put a damper on my online shopping from here on out though (except my Ebooks).

  4. Kristi aka Fiberfool Says:

    I’m an Amazon associate living in CO who suddenly lost book money due to Amazon’s dirty dealing with the state. Today I happened to notice that I’ve been charged sales tax on several of my Kindle book purchases. I don’t know if it had been across the board as it is difficult to wade through all the freebie receipts. I’m also not sure when it started. I have not gotten any communication from Amazon that I’m
    eligible for referral fees again, but was wondering if you’ve heard anything?

    • bufocalvin Says:

      Thanks for writing, Kristi!

      There was a recent decision that changes things…I haven’t written about it yet, because I want to research the decision more first:

      http://www.internetretailer.com/2011/01/28/e-retailers-win-tax-ruling-colorado

      You being charged sales tax isn’t affected by that most likely: I think all of the Agency Models publishers already had a presence in Colorado.

      It does sound possible that you’ll be getting referral/advertising fees again, but I do need to look at the decision more closely.

      Other states are trying to compel internet retailers to collect sales tax for them when those companies did not have to do it before. Here’s my take on what happened in Colorado: I’d be interested in your iinterpretation, since your comment suggests Amazon is at fault in something here.

      1. States can compel internet sellers who sell into their state to collect sales tax if the seller has a physical presence (a “nexus”) in the state (that can be a building, but it can also be a sales force)
      2. This doesn’t affect whether or not the purchaser pays sales/use tax: it affects when that tax is paid, and which entity incurs the cost of collecting it
      3. Following some other states, Colorado attempted to define people who get referral fees as a sales force (the same way employed salespeople would be)
      4. That passed in Colorado, which would have required Amazon to collect sales tax on purchases by people in Colorado. This isn’t just e-books, by the way. California is considering something similar, but California doesn’t collect sales tax on e-book delivered eletronically (as opposed to on a physical storage device, like a CD)
      5. Rather than take on the task of collecting the sales tax, Amazon dropped the Associates program in Colorado

      That was playing hardball, and it did hurt a lot of small earners, in my opinion. If you are referring to how Amazon dealt with the Associates, I can see that. If you are referring to how Amazon has been dealing with the state government…I haven’t seen a place to significantly blame Amazon there.

      6. This new decision may mean you can get referral fees again, but I need to research it.

      How do you see Amazon’s interactions with the state of Colorado?

  5. Jim Says:

    In your example where you are in California and you buy from Amazon and the product is shipped from Kentucky you state that the sale is considered to have taken place in California.

    This is not correct. The sale in question takes place in Kentucy. It is exempt, however, from Kentucky sales tax under their interstate commerce exemption.

    The purchase, however, is subject to California “use tax” (not sales tax) which Amazon is not required to collect because they are not “engaged” in business in California. The purchaser, however, is required to self assess the use tax and pay it directly to California.

    A sale that is shipped from outside California to a consumer in California can be subject to either California’s sales tax or their use tax. The type of tax that applies does not depend on whether the retailer is “engaged in business” in California or not. It is based entirely on the elements of the sales transaction, e.g. if title passed to the purchaser outside California (use tax applies) or if title passed in California and the order was placed with the retailer inside California (sales tax).

    AB 153 is an attempt to require Internet retailers to collect the California use tax.

    Jim

    • bufocalvin Says:

      Thanks for writing, Jim!

      You’re correct about the term “use tax” in that case…I should have been more precise.

      What I’m not clear about in your comment is how in the fourth paragraph a sale could be subject to California sales tax if the sale is not considered to have taken place in California. I’d appreciate you expanding on that.

      I think what you are saying is that, if the purchase is made in California and the item is shipped from outside California, sales tax would apply? If I buy a bed from a company in California, and pay for it in a California store, and then it is shipped from a warehouse in Kentucky, it makes sense to me that I would be subject to California sales tax. If I purchase the bed online from a retailer in Kentucky who then ships it to me in California, I would be subject to use tax?

      The part I don’t understand about that is how it affects jurisdictional sales of books. My understanding is that where you can buy a book has to do with your location, not the seller’s location. Let’s say a publisher has licensed the rights for an e-book for the EU, but not for the USA. If my address (well, residency) is in the USA, I can not buy that book from them without them violating their license agreement. That’s why I presumed the sale was considered to take place where the purchaser was.

  6. Patti Says:

    The publicity surrounding all these Internet tax bills – dubbed ‘Amazon tax’ – is so misleading… and largely funded by Wal-Mart and a few other big retailers. Yea, they believe in ‘fairness’.

    The fact is Amazon DOES create jobs in every state. The Colorado contributor above HAD a job with Amazon. Sure, it wasn’t a full-time job. But it was income. And she PAID income tax on that income. And I bet she spent a lot of that income in the city and state she lives in.

    There are other local employees collecting pay checks as well… USPS and UPS. Internet retail has been a goldmine for them.

    Yes, there is a competitive advantage to not charging sales tax. Which is at least partially offset by the cost of shipping… whether that cost is paid directly by the buyer, or indirectly with ‘free shipping’ because the seller MUST factor that REAL cost into the sales price. (A local merchant doesn’t have a shipping cost.)

    But it would be a severe burden to require an ‘Internet retailer’ to collect and distribute sales tax. If I was a retail store in Denver, I would have one sales tax jurisdiction based on the combined rate of State/County/City. One set of rules.

    If I was an Internet retailer I would have ~ 1,900 tax jurisdictions to ‘figure out’ and comply with.
    It was the business-breaking costs of complying that lead to the Federal Interstate Commerce law (passed pre-Internet) exempting out-of-state sellers from collecting sales tax.
    And yes, as has been stated – in most, if not all states, the buyer still OWES the tax. But the States don’t have access to that information so they can force the buyer to pay. So WHOM exactly is shifting responsibilities?

    Nothing stopping that Denver retailer from selling to folks in other states – and NOT collecting the sales tax.

    There are two ways to ‘level the playing field’…
    Stop all sales tax (yea, right)
    Have a single rate sales tax at the Federal level – a single tax jurisdiction.

    Shifting the burden of compliance to Internet retailers does not level the playing field.

    The states that have already passed these bills are NOT seeing the income promised. In fact Rhode Island is trying to repeal their Internet Tax bill. Their income DECREASED.

    If there was a smart state out there, they would make it ‘safe’ to be an affiliate and then promote that as a competitive advantage to draw affiliates into their state. There’s a number of states that market to CA businesses to relocate for a friendlier business climate.

    People earning income aren’t collecting unemployment and are spending their income in their community.

    Alas, we preach to the (small) choir and scream into the abyss.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Follow

Get every new post delivered to your Inbox.

Join 1,288 other followers

%d bloggers like this: