Calbuzz Op-Ed: Why CA Should Tax Online Sales


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.

Sen. Loni Hancock

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.

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There are 3 comments for this post

  1. avatar ocpd44 says:

    Why is there such a push all of a sudden to tax consumers for on-line purchases? Because the state is failing and it is looking into every nook and corner (like phony pension crises) for every dime they can scratch together. Yet, the republican faction does not want to do a simple thing like extend the taxes imposed by their governor for a few years to get us through a rough time. The fact is, many people buy on-line for a variety of reasons, not for the sole purpose of evading taxes. There is a cost involved. Where storefront retailers usually pay for shipping and pass it on to the customer, on-line retailers rarely do. Nearly always, there is a shipping charge and often a hefty “handling fee” as well that more than offsets the savings involved. Let’s not forget that the state also collects personal income tax and then taxes what is left when spent at the store. This whole op-ed smells more like a conservative gripe because business loses when the public buys on-line.

    • avatar SezMe says:

      There is a push on because CA small businesses are tired of getting screwed by some on-line retailer operating out of Dung Hill, MS is capturing CA consumer dollars yet not contributing one cent to the needs of the state. It’s past due time for CA politicians to look our for their own constituents.

  2. avatar anotherwhiner says:

    Most corporations pay little or no tax. Instead of balancing the state’s budget on the backs of working people and the poor, eliminate the welfare subsidies that businesses and their shareholders enjoy at the expense of the rest of us. Then, we can eliminate sales and use taxes altogether. The increased consumption and profits would more than offset the losses of corporate entitlements.

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