Q&A - Online Sales Tax in California

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That 52-inch flat-screen TV you just bought your loved one (or yourself) for the holidays should be arriving any day now. And what a deal – nice picture, good price, delivered right to your door. And since you made the purchase online, you weren’t charged California sales tax for that shiny new piece of technology. Here’s the thing though: there’s a good chance you owe the California government some money. And the state needs it. You know it and Governor Jerry Brown knows it. In what he called an “Open Letter to the People of California,” yesterday Governor Jerry Brown announced his intention to raise the state income and sales tax. The Governor says the measure will raise $7 billion in new funds for education and public safety. It’s not the first time the Governor has tried to find a way to increase sales tax revenue. In September, he asked online retailer Amazon [dot] com to start charging sales tax on products it sold to Californians. To date, they haven’t collected a cent. So why wasn’t Amazon charging Californians sales tax in the first place? To answer that, we have to go back to 1992. In a case called Quill vs. North Dakota, the Supreme Court ruled that retailers do not have to collect sales tax for any state they don’t have a physical presence in. In other words, Quill Corporation, with its headquarters in Delaware, didn’t have to collect sales tax for mail-order purchases made by customers in North Dakota, for example. So today, under the same laws and reasoning, it means an online retailer like Amazon, with its headquarters in Seattle, doesn’t have to collect sales tax in California. But just because the ruling exempts companies from collecting a tax, it doesn’t mean that the citizens are exempt from paying one. The government still needs the money, so they just change the name from “sales tax” to “use tax.” Nomenclature aside, the money owed is pretty much the same. If this is news to you, you’re not alone. A lot of people don’t know that the use tax exists, which is a big part of the problem. And the California state government has only one weapon to fight use tax evaders/neglectors - the tax audit, which is a very consuming ordeal with serious repercussions, especially when it’s carried out on the state level. But the thing is, fighting use tax evaders with an audit is like trying to kill a cloud of mosquitoes with rifle. You might completely obliterate a handful of mosquitoes, but it’s not going to fix the problem. All the same, California has a big mosquito problem. Amazon [dot] com is the nation’s number one online retailer. Number two is Staples. They collected $160 million for California state government in the year 2010. So experts estimate Amazon should be collecting somewhere around $200 million each year for California. And that’s money the state needs badly – about $20 billion badly. Governor Brown began to search for a solution back in June of 2011. After some posturing and huffing and puffing from all sides, Amazon [dot] com ultimately agreed to go hand-in-hand with the state of California and local brick-and-mortar retailers to pass a nationwide bill that simplifies the tax code and mandates that online retailers collect sales tax for all states. Plain. Simple. But nothing has actually been passed yet. The proposed solution is pretty good – governments get their sales tax money, Amazon [dot] com would be free to establish warehouses and headquarters wherever they want and physical retailers will no longer feel like online retailers are getting an unjust competitive advantage. But shoppers are arguably left holding the bag. The legislators behind the bill argue that they’re not creating any new tax, but in practice, it’s pretty much a legislative shakedown that will leave the people’s pockets a little less full. Another possible solution is to abolish the sales tax entirely. Oregon, New Hampshire, and Alaska don't charge sales tax. The businesses there are happy and so are the people. “California could do away completely with its sales tax and not have to worry about this as a base, and they would have to turn around and, of course, increase their state income tax if they’re going to have any chance of getting out of budget holes that they find themselves in now. It really doesn’t matter, in a sense, where revenues are collected from as long as your base that you’re collecting them from meet up with your objectives as to your provision of public services,” explains former State Economist of Oregon, Tom Potiowsky. California can get revenue from anywhere. If it dropped the sales tax, it would have to make it up somewhere else: higher property taxes or higher income taxes. In the final analysis, it really comes down to a question of governmental philosophy. To oversimplify a bit, a sales tax favors the rich, an income tax favors the poor. With the Occupy movement drawing our attention to the widening wealth gap, it will be very interesting to see how these various ballot initiatives are received. It’s also important to note that California’s budget problems are bigger than sales tax or no sales tax. We need more revenue or less spending. Or both.