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