Viewpoint - March 10, 2010

Guest opinion: Tax-free ride online costs everyone

by Clark Kepler

While economists nationwide argue over whether we have begun to recover from the Great Recession, one financial reality is beyond dispute. Our state is facing the biggest budget challenge in decades. Even in a slowly rebounding economy, California is faced with a projected mid-year budget shortfall of $6.3 billion, which means that local governments — even if they raise school and property taxes — are going to be cutting support for such essential services as policing, firefighting, and schools.

The enormous irony in this troubling story is that California is allowing hundreds of millions of dollars in sales tax to go uncollected by allowing remote online retailers with a significant business presence in our state to ignore their obligation to collect sales tax.

Given the sums involved, you would think there would be many in the state calling for this situation to be remedied. There are not. Perhaps it's because opponents of sales tax equity have, so far, managed to obfuscate the issue through a combination of misinformation and scapegoating.

Under current sales tax law, any out-of-state retailer is required to collect and remit sales tax for purchases made by residents in California if the retailer has a physical presence in our state. Current sales tax laws dictate that an out-of-state retailer has a physical presence in a state if they have a store, warehouse, office, or sales agent in the state. and other online giants have thousands of affiliates in California, and they are actively promoting products sold by these out-of-state businesses. When this promotion results in a sale of said product, they earn a commission. That, by any definition, is a sales agent, and that means that these online mega-retailers have the legal presence in our state that requires them to collect sales tax.

The Amazons of the world and online affiliates are naturally opposed to any steps that states might take to enforce sales tax laws. Strategically, their stance makes a lot of sense because it gives them a significant competitive advantage over our in-state businesses that must add additional cost of sales tax.

Furthermore, there is no doubt that consumers enjoy this so-called advantage. I hear it often: They will shop at out-of-state e-tailers just to avoid paying sales tax.

That sounds fine, but we need to ask ourselves, in the long run, who really is footing the bill for these duty-free purchases?

Well, I can tell you who is not paying the bill: Neither online affiliates nor remote retailers.

We are not talking about just a few dollars here and there flowing out-of-state. The reality is that hundreds of millions of dollars are lost each year, and the figure is growing. This is money that should be going to first-responders, to local communities, and to lessen our tax burden. Instead, this money is flying out-of-state to remote retailers and the affiliates that pocket the cash while taxpayers subsidize their use of our in-state services, our roads, and their very business.

Taking advantage of our state's unwillingness to enforce sales tax laws during the best of times is egregious enough. However, during a recession that has hit our state so hard, it's an affront to every business and citizen in the state.

And what's worse, on an economic level, it makes no sense.

Legislators who oppose sales tax equity tout their belief in fiscal responsibility. But, in truth, how fiscally responsible is it to maintain a public policy that subsidizes out-of-state retailers while punishing in-state, tax-paying businesses and residents? Does fiscal responsibility demand that our state government burden residents and businesses with higher taxes and fewer services to placate out-of-state retailers that only take from our state and provide nothing in return?

Finally, as for those who worry that sales tax equity would somehow harm online business in the state, let me stress that most online retailers, including Wal-Mart, Barnes & Noble, and Sears, already collect and remit sales tax for online purchases. Technological advances have greatly simplified and automated this task. Huge corporate retailers like and are the few remaining holdouts. That said, the money they siphon from our local community and residents is significant and growing exponentially each year.

So please, when you go to the Internet for some tax-free shopping, I would only urge you to remember that your purchase isn't really free at all. In fact, that tax-free purchase costs all of us and our communities a lot more than you might think.

Clark Kepler is president/CEO of Kepler's Books and Magazines in Menlo Park.


Posted by Tax Man, a resident of Menlo Park: The Willows
on Mar 10, 2010 at 8:44 am

Hey Clark, how about you change your business model from some overpriced beatnik lounge to something sustainable, instead of begging for cash to stay in business and then whining that no one is buying your crap because of Amazon? Maybe you have an overhead problem and not a tax problem.

Ever stop to think that more people buy stuff online because its easier, less hassle, cheaper, and then I don't have to fund your overpriced luxury castle? What about the extra income tax that Amazon pays because of all the stinkin' money they make? Maybe the rest of us are tired of paying so much in taxes?

Posted by Steve, a resident of Menlo Park: Central Menlo Park
on Mar 10, 2010 at 1:38 pm

Tax Man -
Clark makes a point that's valid not only for book sales but for anything that's sold on Amazon. Why should Amazon be free to not charge sales tax when any other retail business in the state is required to charge it. This handicap on local businesses is patently unfair. It's driving businesses under or reducing sales. This in turn leads to more job losses and increased demands on unemployment insurance. It deprives the state, the county, and the community of income, which leads to reduced services or higher taxes. Amazon wins - the rest of us lose.
At one time it made sense to temporarily withhold sales tax for on-line purchases in order to encourage the on-line industry. The industry is now robust and can compete on a level-playing field. It's past time to phase out or eliminate their sales tax exemption.
And BTW, Kepler's Bookstore is one of the landmark businesses not only of Menlo Park but of the whole Bay Area. On a par with City Lights in San Francisco and Cody's in Berkeley. Although I use Amazon for other purchases, for books I mostly go to Keplers. It's worth the premium to have such a first-rate bookstore in my town. I would be very sad if it went away - again.

Posted by Joe, a resident of Menlo Park: Allied Arts/Stanford Park
on Mar 10, 2010 at 1:48 pm

Comment on the Libertarian view expressed above by Tax Man:

"Libertarians know the price of everything and the value of nothing."

Posted by Tax Man, a resident of Menlo Park: The Willows
on Mar 10, 2010 at 2:13 pm

Amazon does have to pay in state taxes in the state that it is based. Amazon has to pay federal taxes. Since the US love the federal handout more and more we should all love that Amazon pays lots of federal taxes.

How many people does Amazon employ? Are those people evil? Why should we prop up Keplers? "A Landmark?" its a privately owned business. Its Keplers respnsibility to stay relevent. He has a 10,000 square foot first rate facility on some of the most expensive real estate in the country. give me a break. Sell weed or something that I can't buy online, something in demand something that can pay that wicked overhead.

Finally, this should be a lesson to all the tax and spend types. Have Menlo Park LOWER (gasp) their tax rates so that there is less incentive to buy online. More sales = more revenue = more jobs.

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