How California Sales-Tax Collection Legislation Affects Small Sellers
By Ina Steiner
California is the latest state to pass sales-tax collection legislation, known as affiliate nexus tax laws - Governor Brown signed such a bill into law in California yesterday. Earlier in the week, we asked a lawyer specializing in small-business issues to give us some context and explain what these laws mean to small online sellers.
Deborah Sweeney has extensive experience in the start-up and entrepreneurial industry in her role as CEO of MyCorporation.com and is an advocate for protecting personal and business assets for all consumers. She has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the area of corporate and intellectual property law and is a member of the American Bar Association.
AuctionBytes: Can you explain what is happening with regard to sales tax legislation in California?
Deborah Sweeney: A possible new tax law has been winding its way through the California political system. Bills AB 155 has been proposed to close what has been deemed a loophole in tax law. Right now, thanks to Quill Corp v. North Dakota, California cannot constitutionally force Amazon to collect sales tax as long as Amazon has no physical presence in the state. (See today's breaking news, "Amazon Warns Affiliates in California Hours before Governor Signs Sales Tax Bill - link and, "Amazon Says Goodbye to California Affiliates" - link. - Editor)
Assembly Member Charles Calderon, the bill's author, argues that since Amazon has sister companies with an in-state physical presence, it is therefore physically in the state and should collect sales tax for California. Furthermore, the bill would make any company that markets itself with Californian businesses have to collect tax.
AuctionBytes: How does this affect the small business owner?
Deborah Sweeney: While the implications for a giant corporation like Amazon are clear, the effect it will have on smaller businesses operating between states is less so. There are thousands of companies that use the internet to avoid having to collect sales tax on their consumers. And most customers love that; they happily pay the shipping costs and wait the week for their product if it means they can feel like they got a deal.
However, choosing an online presence over a physical one can makes things tricky. If you have a large storefront in the middle of town, that may be all the advertising you need. But, as an online retailer, it is likely you advertise on other web pages and with other companies. If this bill passes, you better make sure you aren't advertising with California businesses or the taxman may come knocking, looking for California's cut.
AuctionBytes: Does that include California-based Google? If a retailer advertises uses Google AdWords, would this legislation require them to colllect sales tax in California even if they are not based in California themselves?
Deborah Sweeney: As written, that is a definite possibility. The law will apply to any retailer benefiting from marketing tangible property within California. So if AdWords is used on the websites of California based companies, then the business who bought the advertising space would have to collect sales tax on any product sold to a California resident. To make matters worse, the business would have to keep track of every sale made as a result of an AdWords referral, which takes more time away from running the company and makes collecting sales taxes extremely complicated.
AuctionBytes: For sellers using a fulfillment service, such as Amazon FBA, how does storing their inventory in a fulfillment center in another state affect their tax obligation?
Deborah Sweeney: If you have a distribution center in California, according to AB 155, you will have to collect sales tax on products sold to Californians. However, if this law passes, Amazon will likely pull any fulfillment centers they have within California, simply to avoid the tax burden. Different states have different laws as to what qualifies as a physical presence; for some, it is as simple as using a warehouse within that state and, for others, the definition gets a little murkier. Amazon has made it clear that it opposes these laws, so it is highly likely that, if you do utilize the FBA program, Amazon will not keep centers in California.
AuctionBytes: Are there any retailers that would benefit from such legislation?
Deborah Sweeney: If you choose to follow the law to a T and continue to advertise as you did before, overall market share will likely reduce. You probably sell a product that your customers can get in a physical store. If they have to pay tax, shipping, and wait, there is little stopping them from just heading into town.
Retail giants like Wal-Mart and Home Depot support this bill for exactly that reason; driving customers off the internet and into their stores. Gas is expensive and California traffic is always a pain, but your average consumer will deal with both of those problems if it means saving a couple of bucks and getting their desired product instantaneously.
AuctionBytes: How does this affect affiliates?
Deborah Sweeney: This law may also have a serious impact on companies that enjoy their affiliate status with large, online retailers. Affiliates get a chunk of change for every referral their website sends to the retailer. And that money is already taxed.
Amazon has already shown it is willing to pack up and leave any state that passes this type of law; North Carolina and Rhode Island did, and Amazon kept its word to leave. If the law passes the California Senate and becomes law, online retailers will likely be scared off. To make matters worse, it may also scare off the small businesses that willingly pay their state incomes taxes to California. An affiliate status, potentially, represents a lot of money being channeled into a company. Why would that company stay in a state that shooed away a large source of income?
AuctionBytes: Will sales tax legislation impact businesses in all states equally?
Deborah Sweeney: There will always be states that are more than willing to skirt around collecting sales tax. Nevada and Delaware's stance on corporate taxation proves that, if it attracts more business, states are more than willing to bite the bullet in the hopes of recouping the losses through other channels associated with bringing those businesses to the state; after all, some tax is better than no tax. As of now, the battle continues to rage, but Governor Jerry Brown has made signs that he supports forcing online entities to collect sales tax on products sold to Californians.
AuctionBytes: What can sellers do?
Deborah Sweeney: The best thing to do now is to look at your current business situation, ask yourself if this law can impact you either through your affiliate status or by threatening your sales to California and, if you live in the Golden State, contact your district's state senator.
AuctionBytes: Can you explain the Streamlined Sales Tax initiative?
Deborah Sweeney: Sure. When the Quill decision was handed down in 1992, many states were afraid that Congress was going to make it permanently impossible to collect sales tax on online transactions. Many states believed this would be a devastating blow to their overall revenue, and moved to make an agreement to simplify use tax laws in the state. Member states have an easily calculable tax rate that it expects retailers to collect.
At the moment, it is entirely voluntary; sellers who want to sign up can with the understanding that, when collecting tax on remote sales becomes mandatory, they will be given a period of amnesty. They are constantly lobbying Congress and attempting to pass a federal law to force remote sellers to collect state taxes.
AuctionBytes: How would the Streamlined Sales Tax initiative impact small sellers, and would they be exempt from collecting sales tax on out-of-state purchases?
Deborah Sweeney: As I said before, all of this is voluntary at the moment. However, forty-four states have signed on to the initiative project in an attempt to clear a major obstacle currently standing in the way of requiring online business to collect sales tax; inconsistent tax laws. If the initiative does end up reaching its goals and is successful in passing a federal law to require sales taxes be paid on all purchases, from remote sellers or otherwise, it could stand to hurt small sellers. As it stands, one of the best parts to buying products online is the lack of a sales tax. Get rid of that, and you get rid of the competitive advantage that most online retailers have.
Unless you sign on to voluntary collect tax for a period of 36 months, small retailers will have to collect sales tax on all out-of-state purchases and send that tax to the state. However, after a brief period of amnesty, even those who volunteered will have to collect taxes as well. The SSTI does have a plan to make this process as easy as possible, but if successful it will mean another tax that small sellers will have to contend with.
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About the author:
Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to firstname.lastname@example.org.
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