Amazon.com is a goliath. Last year, the company posted revenues totaling $19.2 billion, an increase of 26 percent during a steep recession. Yet Amazon rips off the state of California each year by refusing to collect sales taxes on its transactions. That gives the company a huge advantage over its competitors, effectively allowing it to undersell traditional retailers who are required by law to collect the tax. But the state's independent booksellers, who have been devastated by Amazon's furious growth, are fighting back. And they're getting help from freshman Democratic Assemblywoman Nancy Skinner of Berkeley.
Skinner's first ever piece of legislation would effectively force Amazon to start collecting sales tax in California and then transfer those funds to the state treasury.
The Northern California Independent Booksellers Association, which asked Skinner to sponsor the legislation, estimates it will generate at least $55 million of revenue for California. That may not sound like much for a state that just solved a $42 billion budget crisis, but the independent bookseller's primary interest is leveling the retail playing field. "Amazon.com is the Wal-Mart of online retailers," said Hut Landon, the NCIBA's executive director. "This is an issue of fairness."
Bay Area independent booksellers have been battling online retailers over the issue of sales tax for nearly a decade. In 2000, they sponsored legislation carried by Assemblywoman Carole Migden that sought to force BarnesandNoble.com and Borders.com to start collecting sales tax. The nation's two largest bookstore chains fought the bill, arguing at the time that their online divisions should be exempt because they weren't located in California and because they were separate entities from their bookstores.
Migden's bill passed both houses of the legislature on mostly party lines. Democrats supported it; Republicans opposed, arguing that it represented a "new tax." But there was one key Democrat who stood against the booksellers — Governor Gray Davis, who vetoed the bill. Davis claimed it would harm the growth of the World Wide Web and California's role as an e-commerce mecca. "Imposing sales taxes on Internet transactions at this point in its young life would send the wrong signal about California's international role as the incubator of the dot-com community," he said in his veto message.
But the independent booksellers didn't give up. Several years later, they convinced California's Board of Equalization, the state's taxing agency, to take Borders.com to court. In 2005, a state appellate court ruled against Borders, saying the state had the right to force the company to collect sales taxes, even without Migden's bill, because of a 1992 US Supreme Court decision. The high court's decision stated that out-of-state retailers must collect state sales tax if they have a presence or "nexus" within the state.
The California appellate court ruled that Borders' bookstores in California represented that "nexus." Ever since, both Borders.com, which is now operated under contract by Amazon, and BarnesandNoble.com have charged sales tax to their online customers from California, and to customers from every other state in which they have bookstores. "The Borders case made it clear to everybody that when people buy from Borders.com, they're buying from Borders," said Lenny Goldberg, a Sacramento lobbyist for the Northern California Independent Booksellers Association.
Then last year, independent booksellers in New York decided it was time to target Amazon, which now not only dominates the independents, but the chains as well. The booksellers convinced New York state legislators to force Amazon to start charging sales tax there. Amazon immediately sued the state, arguing that it was different than Borders and Barnes & Noble because it has no retail stores.
But in January, a New York judge ruled against Amazon, saying that the company did have a "nexus" in the state because of its unique relationship with thousands of "affiliates." A major part of Amazon's business model is to contract with and pay other web site operators to refer Internet users to Amazon. The New York judge ruled that these affiliates fell within the Supreme Court's definition of "nexus." "They do meet the nexus definition," said Oren Teicher, chief operating officer of the American Booksellers Association, which co-sponsored the New York law. "The affiliates are acting as sales agents."
Amazon has hundreds of affiliates in California too, and Skinner's bill is patterned after the New York law. Skinner said she decided to go after Amazon in her first bill because "local businesses are struggling to keep their doors open." Amy Thomas, owner of Pegasus and Pendragon Books of Berkeley and Oakland, said it's about time a state politician stood up to the online giant. She said she has countless stories of customers coming into her stores, researching books, and then buying them on Amazon. "You help a person for fifteen minutes, tell them you can get the book for them, and then they say, 'Let me call my husband to see if he's online,'" Thomas said.
Amazon is expected to appeal the New York ruling, and to fight vigorously against Skinner's bill. Local booksellers expect Republicans will make the same argument as before — that it's a new tax, even though it obviously isn't. National anti-tax groups, such as Council on State Taxation, aren't even making that contention. They believe that if states want to tax online retailers, they need to get Congress to pass a law that would allow them to do it.
In California, the wild card is Governor Arnold Schwarzenegger. Clearly, Davis' argument about the "young" Internet is now laughable. Amazon is the biggest player on the block by far, and it's ridiculous that California continues to shortchange itself while giving the massive retailer a significant advantage over its competitors. That's especially true when more and more are closing their stores every day during the worst economic downturn since the Great Depression.
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