My local newspaper ran a story about the escalating battle between Amazon.com and the state of California. At issue is the collection of sales tax: Governor Jerry Brown signed a law requiring online retailers to collect state sales tax on purchases made by CA residents.
Before the ink dried on the legislation, Amazon severed ties with its estimated 10,000 affiliates in CA. These are – or were – small businesses that earned commissions on customers who clicked through their website to the online bookseller.
The immediate effect, of course, is not an increase but a reduction in tax revenue for the state, due to the loss of taxable income from the affiliates. And Amazon isn’t the only company that’s taken action; Overstock.com is doing the same thing, as well as others that don’t make the news. As usual, the government overlooked the unintended consequences of their legislation.
But the issue is greater than just the immediate tax ramifications. And it’s bigger than just Amazon. There are long-term consequences for tax revenue, employment, and perhaps even the quantity and quality of the goods and services being offered in the state.
With the biased newspapers, it starts with the “fairness” issue. Most seem to make no distinction between the type of businesses operating within the state, pointing to the “unfair advantage” Amazon has over storefront locations like Barnes and Noble. If B&N has to collect the sales tax, why shouldn’t Amazon?
This reasoning is typical shallow journalism and overlooks previous Supreme Court rulings. The high court ruled in 1992 that an out-of-state retailer cannot be forced to collect sales tax unless it has a physical presence in the state. It’s not the level playing field that prejudiced reporters try to claim; brick and mortar retailers use roads and other resources paid by local taxpayers, while the out-of-state company has an almost zero footprint. This was the crux of the Supreme Court ruling.
Nevertheless, California tried to tax the Internet in 2000 and again in 2009, with legislation declaring that affiliates, even though not employees of the company, constituted a “physical presence.” Both governors at the time vetoed it. The third time was a charm, though, and CA is now the ninth state to pass a law taxing Internet sales.
Amazon has already introduced a ballot referendum to overturn the law, though some lawmakers (all Democrats) claim the ballot initiative is unconstitutional. It’ll likely go to court, and if it qualifies for the ballot, voters like me will probably see it next year in our little white booklet.
Let’s not forget that the tax is already supposed to be paid by the consumer. I add sales tax for Amazon and other online purchases to my income tax return every year. I’m sure many people don’t, but I’m also certain the government’s projected tax revenue from this law is overblown.
In my mind, there’s a more fundamental question for those making the fairness argument: Who is responsible for whose mistakes? Government is in desperate need of revenue – but whose fault is that? Why should Amazon be responsible for the fiscal irresponsibility of the California legislators? It’s no secret the state has major financial shortfalls – but how’d they get there? Under Gray Davis, the state went from a budget surplus to a budget deficit in less than four years. We’ve never recovered. Why is that suddenly the problem of a business that works in a different state? Shouldn’t the government be cutting back on their budget?
The long-term consequences on tax revenue are obvious. It seems a tenet of common sense that lowering tax rates attracts more business and thus more tax revenue. That’s a simplistic view, but the direction is correct. More businesses would move here if the state government passed laws that enticed them to do so, and maybe I would spend some money on these goods and services and thus create more tax revenue.
Amazon decided against moving to the San Francisco bay area, in spite of it being one of the best sources for technical talent, due largely to the tax structure of the state. “It didn’t pass the small state test,” said CEO Jeff Bezos. It’s a well-known fact that many businesses decide against headquartering in the state due to the high-tax/high-regulation atmosphere. And many are leaving for the very same reasons. This all reduces long-term tax revenue.
Then there’s the employment issue. Current actions by state leaders are driving this source of employment away, along with many others. Think about it: if the primary source of your revenue came from businesses and workers paying taxes, wouldn’t you do everything in your power to attract businesses and employ workers? This certainly doesn’t seem to be the path government leaders are pursuing.
Last, these actions ultimately lower the quality and number of goods and services available to me and my fellow Californians. This is not the case with Amazon and most other online retailers, as we can still place orders. But the underlying message to businesses considering CA as home is the same: You better think twice about coming here.
This trend is well underway, and with fewer companies wanting to do business in the state, the eventual result is fewer products, scarcer services, fewer choices overall, and lower quality. If you doubt that, just look at how difficult it is to open a bank account in Switzerland; it’s almost impossible now for a U.S. resident to do this, and it wasn’t that long ago that the Swiss would do anything to attract U.S. customers. It’s the same principle here; you make it too onerous to do business here, they’ll go elsewhere, reducing the options available to residents.
What can be done? Reversing this vicious cycle will have to include government leaders. And it starts with them answering one simple question: Businesses and consumers will always react to new laws and revised tax structures; what reaction do we want them to have? Do we want them to react like Amazon? Or do we want them to be knocking on our door to come here?
Until government leaders understand, on their own or through voters, that it is businesses and workers they want to see prosper, no one will, including the State. And that applies to the U.S. of A., too.
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