Amazon Defies Law, Does Not Collect Sales Tax in California, Yet Dumps Affiliates

So far, Amazon is thumbing its nose at the state of California, refusing to collect sales tax on purchases made by Californians.

According to the state law, however, designing its Kindle within California may cause it to pay taxes, even after the company terminated its agreements with its affiliates in the state.

California Gov. Jerry Brown passed a portion of the state budget on Wednesday night that would require Internet retailers with affiliates in the state of California to collect sales taxes from customers living there.

The so-called budget trailer bill, ABx1 28, was authored by Assemblymember Bob Blumenfield (D-San Fernando Valley) and took effect Friday, a spokesman for the California State Board of Equalization confirmed.

Amazon representatives could not be reached for comment on Thursday night. But the company said that it would not comply with the new law, in a statement sent to The New York Times.

"This legislation is counterproductive and will not cause our retail business to collect sales tax for the state," Mary Osako, an Amazon spokeswoman, said in an e-mail.

It's true, however, that Amazon is not collecting the tax. PCMag.com purchased a pair of MP3s from Amazon on Friday - one, via a virtual private network (VPN) connection to the company's New York headquarters, and a second from a cable modem physically located in California. Amazon did not charge sales tax for either purchase.

By law, those MP3s are subject to the state's "use tax," which essentially applies sales tax to purchases made from out of state, including Web merchants. But those taxes are rarely collected, prompting California's new law.

As a result of the new law, Amazon terminated its relationships with California affiliates this week. "We oppose this bill because it is unconstitutional and counterproductive," the company said in a letter. "It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action."

The tax process

According to Anita Gore, deputy director of external affairs at the BOE, the law requires a company doing business in California to register with the state and file a quarterly tax return.

The third quarter began Friday, covering the period through September; about a month later, "we'll have an idea what compliance will be," Gore said.

Thirty days after that, the state will send a delinquency notice to any companies that do not comply with the law. The state can also perform its own audit and determine what tax, if any, is owed. If a company does not file with the state, it can be charged a 10 percent penalty and interest on that, Gore added.

Companies can appeal the process through a series of hearings with the BOE. That process can last up to a year or more, Gore said, then go to court. If a company wants to expedite the process, it can pay its tax, then ask for a refund. If denied, that company could also sue.

By law, the state posts a list of the individuals and companies with the highest tax delinquencies every quarter, over $100,000, as a "name and shame" strategy.

"Since the inception of this program, the Board of Equalization has received a total of $5.1 million from 36 qualifying taxpayers that came forward to take care of their debts: 25 through installment payment agreements and 11 by making payment in full," the BOE notes.

Why Amazon might be liable

On Friday, the state BOE posted a special notice explaining the new rules for companies doing business in California. There's a key clause:

"Any retailer that is a member of a commonly-controlled group and is a member of a combined reporting group that includes another member of the retailer's commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performs services in this state in connection with tangible personal property to be sold by the retailer, including, but not limited to, design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer."

Amazon houses Lab126, which works on its Kindle readers, in California. On the bottom of the company's "About" page, there is a statement: "Lab126, part of the Amazon.com, Inc. group of companies." The "Contact" page lists an address in Cupertino, Calif.

Although Gore declined to comment on Amazon specifically, she confirmed that any company who housed a design operation - the "design and development of tangible personal property" - would be defined as a nexus, the definition that triggers the new tax law.

Editor's Note: This story was updated at 5:35 PM PT on July 1.

For more from Mark, follow him on Twitter @MarkHachman.

 

via pcmag.com