By Alissa Anderson
and Jean Ross
Special to Calbuzz
On this “Tax Day” and throughout the year, millions of Californians do their part to sustain the schools, health care, public safety, and other foundations of a healthy state. But projections show today’s collection will come up at least $1 billion short of what is due because most Californians won’t add the sales tax they owe on online purchases to the bottom of their California income tax form. With the state once again facing tough budget times, these dollars could go a long way to close our gaping budget gap.
Most Californians may not realize that if a retailer fails to collect the sales tax due on a book, a pair of shoes, or other purchase made online, the purchaser still owes the tax. This requirement is nothing new – it’s been part of state law since 1935. The hitch comes in trying to collect the tax. In fact, only 1 percent of those who buy online from out-of-state companies like Amazon.com currently pay the taxes due. As online sales soar, they also take a big, and growing, bite out of the state’s revenue collection.
Some online merchants have structured their businesses explicitly around tax avoidance – locating in small, low, or no sales tax states – while refusing to cooperate with state tax officials trying to collect what’s due. These sellers under price local “brick-and-mortar” stores and California-based online firms by betting consumers will never pay the tax, and hurt the local economies they support. California businesses lost an estimated $4.1 billion in sales to online retailers in 2010, costing jobs and pulling dollars out of local communities, a trend that continues to grow.
While US Supreme Court rulings prevent states from requiring businesses that operate entirely outside their borders to collect taxes owed, California does have a number of options available to boost compliance, help close the budget gap, and level the playing field for hometown businesses. The urgency of the situation and complexity of tax avoidance strategies used by online sellers demands a multi-pronged attack aimed at shifting the responsibility for collecting taxes owed from purchasers to sellers – similar to requirements imposed on in-state businesses.
First, lawmakers should give state tax officials clear direction to pursue any and all avenues to require out-of-state sellers to collect taxes owed, following precedent established by states such as Minnesota and Virginia. Currently before the Legislature, SB 234 – authored by State Senator Loni Hancock and sponsored by Betty Yee, a member of the state’s elected tax agency – would provide this framework. This approach would allow California to tailor its approach to rapidly evolving technology and law.
Lawmakers should also direct tax officials to aggressively pursue retailers that use complex corporate structures to avoid collecting amounts owed. An Amazon subsidiary, for example, develops its wildly popular Kindle in Silicon Valley while its corporate parent dodges responsibility to collect sales taxes from California-based customers. Assemblymember Chuck Calderon’s AB 155 would clarify this responsibility.
A third approach – AB 153 by Assemblymember Nancy Skinner – modeled on New York law, clarifies that out-of-state firms that use California-based “affiliates” for marketing purposes are responsible for collecting sales taxes on products sold to Californians.
Together, these efforts represent a comprehensive approach needed to counter efforts from Amazon and other companies to protect a business model that shortchanges the state and hurts homegrown businesses. California should join states from Texas to New York and take comprehensive and aggressive action. By taking our rightful role as leader as the nation’s largest market state, the Golden State can pave the way to a national solution.
Alissa Anderson is deputy director and Jean Ross is executive director of the California Budget Project, a nonpartisan fiscal and policy research group in Sacramento.