Evaluating the potential outcomes of passing the “Amazon tax” to force out-of-state retailers to collect California sales tax, the legislature will be forced to make a business design – something government entities are notoriously bad at.  They need to look at revenues and expenses, and the impact on California citizens.  We’ll save the debate about “level playing fields” and what’s fair and unfair for another day.

Revenue

It is likely that some online stores will chose to comply with the new law and dutifully collect the sales tax.  What percentage of overall CA internet sales receipts will this represent?  Hard to say.

Expense

Many large online stores will stop advertising on California-based websites, severely diminishing the earnings of those websites.  This will dramatically reduce income tax receipts for California, and will also reduce state sales tax as the owners of those websites cut back on their spending.  Some will move out of the state entirely and take their entire tax check with them.

The California government will also incur the expense of enforcement.  How will they determine what online stores shipped how much of what to California residents?  There is definitely an audit and compliance cost here.

And then there’s always the legal fees.  The 1992 Supreme Court decision Quill v. North Dakota expressly states that it is unconstitutional for an out-of-state retailer to be responsible for collecting in-state sales tax.  The legislature would be foolish to assume Amazon, Overstock, and others, will simply ignore this fact and not challenge them in the courts.  Lawyers are expensive.

Impact on Californians

Should this bill pass, every Californian who shops online will be worse off.  Even though people are supposed to report their online untaxed purchases on their tax returns, few do.  To the vast majority of the population, it will be seen as a “new tax” — which in today’s political climate might as well be career suicide for lawmakers.

Businesses here that make a living selling advertising online to out-of-state retailers could be devastated when those retailers pull out of California.

Owners of local brick-and-mortar stores will be the first to cry “victory!” But it will be a short-lived celebration.  With the exception of a few big-ticket items, I don’t believe “sales-tax-avoidance” is the #1 reason people shop online.  Convenience, better selection, and lower prices all rank higher.  Does anyone really expect the mom-and-pop bookstores to see a sudden overnight boom in business if this passes?   I imagine they still might have difficulty competing with Amazon’s economies of scale that allow them to offer still lower prices, free shipping, and the biggest selection on the planet, and stay open 24 hrs a day.  And that’s assuming Amazon would collect the tax, which they’ve already said they won’t.

So in the end, no one is better off.

I think the moral of the story, for California lawmakers, is that sometimes the best action is inaction.  By not passing this bill, you almost certainly save money for your state, and make your constituents better off.  Now it’s no longer a business decision, but a no-brainer.  (Insert cheap shot here about how that’s perfect for politicians!)

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