Painful awards shows aren’t the only odious things stirring in California these days. State lawmakers want to collect sales taxes on Californians’ purchases from out-of-state e-commerce retailers. There is a better policy solution than California’s scheme: an origin-based approach whereby taxation is determined by the location of the seller rather than the buyer. If you’re going to get taxed, it’s only fair that you get to vote for — or against — the politicians taxing you.
The 1992 Supreme Court decision Quill v. North Dakota, which currently governs how online sales are taxed, prevents states from collecting sales tax from retailers with no physical presence in their state. For instance, if an Oklahoma resident buys something from a retailer in Texas, Oklahoma cannot collect sales tax on the purchase unless the seller has a warehouse, store or office in the state. (Technically, the buyer is required to pay a “use tax,” but this is difficult to enforce and thus widely ignored.)
California’s proposed legislation attempts to capture this revenue by expanding the definition of “presence” to include the affiliate programs, or commission-based smaller retailers driving customers to larger retailers’ sites. For example, if you visit the fictional Los Angeles-based “newbooksreviewed.com,” click on a link to Amazon and buy a book there, Amazon pays a sales commission to “newbooksreviewed.com.”
Under the proposed legislation, Amazon would remit sales tax to California on that transaction, despite the fact that perhaps neither the buyer nor Amazon has a presence in the state.
This policy will have severe unintended consequences. Amazon says if this measure becomes law, it will end its relationship with more than 10,000 California affiliates. That would reduce the legislation’s projected revenues by 50 percent and even more if other online retailers follow suit. Overstock.com has already severed ties with affiliates in New York, Rhode Island and North Carolina, in response to similar legislation.
So why not stick with the Quill status quo?
Traditional brick-and-mortar retailers claim that it puts them at a disadvantage versus online retailers whose transactions are often tax-free. Tax jurisdictions, including California, dislike Quill because as more commerce moves to the Internet, they lose more tax revenue.
As controversial as Quill is, it keeps politicians from overreaching and imposing taxes on those to whom they have no accountability. California’s plan would do away with this safeguard, subjecting out-of-state businesses to California’s tax regime. If every tax jurisdiction followed suit, companies with affiliate programs would be forced to remit sales taxes in a nationwide maze of more than 7,500 different jurisdictions — each with different rates and exemptions — creating a costly accounting nightmare and a burden on interstate commerce.
An origin-based tax regime, based on the vendor’s principal place of business instead of the buyer’s location, will address the problems of the current system and avoid the drawbacks of California’s plan. This keeps politicians accountable to those they tax. Low-tax states will likely enjoy job creation as businesses locate there. An origin-based regime will free all retailers from the accounting burden of reporting to multiple jurisdictions. Buyers will vote with their wallets, “choosing” the tax rate when making decisions about where to shop online and will benefit from downward pressure on sales taxes. Finally, brick-and-mortar retailers would have the “even playing field” they seek.
Congress should exercise its authority over interstate commerce and produce legislation to fundamentally reform sales taxes to an origin-based regime. In the meantime, California legislators should resist the temptation to tax those beyond their borders. Might we suggest an awards show tax?