[Update: The bill has been postponed until next year, more here.]
As in most states, when Californians buy something online from a store that is based in California, they have to pay sales tax. When they buy something online from a store that does not have a presence in California, they don’t have to pay sales tax. Right?
Wrong.
Even though out-of-state retailers aren’t currently required to charge sales tax when selling into California, California consumers are actually supposed to keep track of everything they buy online from out-of-state stores and pay a “use tax” at the end of the year. The problem is that nobody does -- the law is almost impossible to enforce -- and California is losing out on significant income.
I was in Sacramento this past Monday meeting with legislators to lobby against a proposed bill by the California Revenue and Taxation Committee that offers a "creative” solution" to this problem. While well-intentioned, it would have disastrous ramifications for California Internet businesses.
Here’s how it would work: If you have a web-based business in California and collect revenue by showing out-of-state companies’ ads on your site, Bill AB178 will claim that both you and the businesses you advertise on your site have residence in California, and are therefore required to pay California sales tax. For example, say your Santa Monica-based web site shows banner ads for Amazon.com. With Bill AB178 in place, Amazon.com would be classified as a California-based business based on the fact that your business draws affiliate advertising sales revenue. Amazon would then be required to collect sales tax on all sales into California. The idea behind the bill is that California could force out-of-state retailers to collect and pay California sales taxes.
Sounds pretty reasonable on paper, but the reality is that a large number of those advertisers will simply refuse to work with California’s small online businesses, resulting in lost business income, lost business tax and a large number of lost jobs -- which will add to California’s rising unemployment. This is exactly what happened in New York when they passed a similar bill, nicknamed the “Amazon tax", last year: roughly 200 advertisers stopped advertising on New York-based web sites that were impacted by the legislation.
Besides the obvious income, tax and job losses, the bill could also have a significant long-term impact. Small web-advertising businesses will leave California and new companies will choose other states for setting up their businesses, making California less competitive in the tech sector.
Based on my own Internet-business background and experiences in building our web-based ecommerce company Savings.com, I’m critically aware of the impact that this will have on emerging California-based online businesses. There are roughly 40,000 people that depend on online advertising revenues in California. These businesses, some as small as one person, will be devastated by this legislation. And yet the vast majority don’t have the resources to get actively involved in lobbying against the bill, even though it will have such a critical impact on their bottom line.
As I said earlier, California is losing out on significant income because of the issue that this bill is trying to address. Clearly, lost income for the state isn't an issue that can be ignored. But it is not something that should be remedied at the expense of the Internet businesses of California. It’s really a national issue, and I’m happy to report that I’m not the only one who feels this way. Congress is expected to introduce a Federal bill any day.
We’ve heard that the California legislature might take a vote on AB178 this coming Monday. As a California entrepreneur who understands the challenges small businesses already face without adding on a crippling state tax, I’m rooting hard for a defeat.
Loren Bendele is chief executive of Savings.com, a premiere online savings and discount service. Loren has extensive experience in e-commerce, online community building, and all things related to online savings.