Thursday, August 4, 2011

Amazon, Sales Tax, and The Internet vs Brick and Mortar

On a recent Friday, I was in the car driving down from San Francisco and KQED radio's Forum program featured an hour-long segment on California sales tax and Here's the synopsis from the KQED page:
Online retailer Amazon is fighting back against a recent California law that taxes Internet purchases from out-of-state companies. State officials say the law will generate up to $200 million a year in unpaid taxes. In response, Amazon officials are launching a petition drive to overturn the law. 
As with many of these Forum programs (like many national talk radio programs), the show wandered between frustratingly oversimplified background info and useless PR demagoguery. And while they pushed me to the point that I almost called in, I opted to focus on driving and save my energy for another blog post on this topic.

First, a couple of foundational points:
  • California needs money to fund it's government.
  • Sales tax is one of the methods used by the state to take in money
Various associated groups will frame this issue of sales tax nexus around two themes, the Internet versus Brick and Mortar, and the moral responsibility for businesses that sell things in the state to pay for stuff in the state. The Forum program rode both of these themes pretty hard through their hour long segment.

The Internet versus Brick and Mortar is an easy story to play for an emotional response. It's essentially a replay of You've Got Mail. In this episode, you get a small, local bookstore owner getting their head handed to them by the giant Internet Goliath. Of course, it has nothing to do with selection, convenience, reviews and value-adds, or base price (typically half that of retail) -- it's the 10% discount that customers get by avoiding sales tax. Don't worry, the arguement sounds better when it comes from Meg Ryan.

As for the moral responsibility for businesses, the reality is that businesses are driven by costs and profits. As much as we might wish for a moral component to business, many of the same "moral" forces that drive business also drive consumers -- namely cost. I can't tell you how many times I have been hanging out in my local bike shop when someone came by, looking for sales support, information, or a tangible product experience -- only to leave and purchase the same products over the Internet. Or, the other classically similar event -- purchasing a "low cost" bicycle over the Internet, being overwhelmed by the challenge of assembling the bike, then taking their Internet bike to the LBS for assembly. For these consumers, where is their moral commitment to their local community? And they live there.

That's not to say that people and businesses shouldn't act with a morally ethical perspective. Rather, simply expecting tax and revenue from the philanthropic morality of businesses or individuals is unrealistic.

The Real Issue with Sales Tax
Ultimately, the real issue here is whether sales tax is a viable way of collecting revenue in the age of the Internet. It's not just Amazon Affiliates and location. If you buy software for your computer and then download it, that's not subject to sales tax. On the other hand, if you buy the same software on a CD, it's taxable.

Using affiliate location to define nexus is a new arbitrary interpretation that California (and other states that have tried to use this technique) have rolled out in an effort to strong-arm companies like Amazon for some money. Suppose you publish a blog or a web site and your server is located in Texas -- is your sales tax nexus in California or Texas? In the old days of brick and mortar, it would be difficult to stretch your store across state lines -- now, you can find yourself in the middle of complex interstate commerce questions with a credit card and a few clicks of the mouse.

Anyone who has set up (or considered setting up) an e-commerce system (particularly in the early days) understands the challenge and complexities of location, nexus and sales tax. What makes it even more challenging is the constantly shifting landscape of local sales taxes. Even for a "morally responsible" small business, attempting to navigate the landscape or maintain an infrastructure that worked with it can be problematic. Meanwhile, what if you sell something to someone on eBay? Do you have to collect sales tax? How do you know? Are you certain that you are in compliance with all of the local laws that affect the affect your purchaser?

Of course, this doesn't really solve the problem of how to address revenues that have traditionally been collected through sales tax. Clearly, as a society, we need to find a way to reinterpret this system and make adjustments to make it fair. Unfortunately, simply having the state make an arbitrary revenue land grab is not the way.

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