Now, at a California Assembly hearing on “Use Taxes” the California Board of Equalization staff raised calls for alarm as to what this legislation would really mean for California. Read the draft Board of Equalization Staff Legislative Bill analysis here (Pdf.)
Some interesting points in the analysis:
- The BOE would incur costs to administer this bill. These costs would be attributable to notifying affected out-of-state retailers and ensuring compliance, potential litigation costs, and costs related to revising the BOE’s Regulation 1684 and related publications, and answering inquiries. An estimate of these costs is pending.
- The revenue impact from this proposed change to the definition of a “retailer engaged in business in this state” is subject to considerable uncertainty. And, there could be an unknown delay of any revenues due to potential litigation arising from enactment of this provision. In a purely static world (no behavioral changes resulting from the change in tax policy) with full compliance, we estimate that the proposed change would lead to a state and local revenue increase of $152 million in 2011-12 (a half-year effect) and $317 million in 2011-12. These estimates are based on the combination of (1) the amount of revenues currently being collected in New York, adjusted for California’s larger economy, and (2) increased revenues associated with out-of-state retailers that sell to California consumers on eBay that would have a use tax collection obligation under the provisions of this bill (see Comment 3).
- However, the State’s likelihood of actually realizing these revenues depends entirely on (1) Internet retailers’ (such as Amazon and Overstock) willingness to continue their affiliate programs, and (2) other retailers’ willingness to continue to sell on eBay and to fully comply with the added use tax collection obligations imposed by this bill. We have received direct confirmation from Amazon that it will terminate its relationship with its 10,000 California affiliates should this measure become enacted. We estimate that Amazon currently comprises roughly 50 percent of the Internet sales of large firms who currently do not have nexus in California. Consequently, the static revenue estimates cited above, adjusted for Amazon’s response, would drop to $114 million in 2011-12 and $234 million in 2012-13. If other firms were also to terminate their affiliate programs in response to the enactment of this bill, the potential revenue gain would be further diminished. Similarly, while we lack the data to determine to what extent out-of-state retailers would discontinue their use of eBay to sell to California consumers, any drop in such eBay usage would even further lower the revenue gain.
- Additionally, the termination of affiliate programs would have an adverse impact on state employment, which in turn would lead to lower revenues from sources such as the personal income tax and the corporation tax. The amount of these potential reductions is unknown.
In fact, California Board of Equalization member and former California State Senator George Runner issued the following press release (Pdf):
Board of Equalization Member Senator George Runner today warned that Amazon will terminate its relationships with more than 10,000 California-based affiliate businesses if pending legislation becomes law.
“In no uncertain terms, Amazon has made it clear to me that the checks they send Californians will be cut off overnight if pending legislation aimed at regulating their operations becomes law,” said Runner.
Runner cited a letter he received from Paul Misener, Amazon’s Vice President for Global Public Policy, in which Misener cites four specific bills—AB 153 (Skinner), AB 155 (Calderon), SB 234 (Hancock), SB 655 (Steinberg). These measures all aim at requiring out-of-state online retailers like Amazon to collect sales tax on purchases made by Californians.
In his letter Misener writes: “If any of these new tax collection schemes were adopted, Amazon would be compelled to end its advertising relationships with well over 10,000 California-based participants in the Amazon ‘Associates Program.’”
Runner warned, “This is an imminent threat to California jobs. Lawmakers would do well to pay attention.”
Misener notes that similar statewide terminations have already occurred in North Carolina, Rhode Island and Colorado after those states enacted similar laws.
Misener explains that these participants—also known as affiliates—“place Amazon advertisements on their websites, and then are compensated by Amazon for purchases made by visitors whom they refer to Amazon’s website.”
A revised Board of Equalization analysis of the pending Assembly measures cautions that 50% of projected revenues would vanish as a result of Amazon’s action. Revenues would be “further diminished” if other firms also terminated their affiliate programs.
The BOE analysis also warns of an “adverse impact on state employment,” resulting in lower corporate and personal income tax revenues for the state.
In conclusion Runner said, “The Legislature needs to stop considering bills that would hurt jobs and instead start improving California’s dismal business climate so we can attract much-needed jobs to our state.”
So, the California Board of Equalization understands just like the other states that this legislation is disputable in its federal constitutionality, will raise far less revenue than touted and will cost Californians jobs.
Oh yeah – the answer is easy. California Democrat legislators, including Assemblywoman Nancy Skinner (D-Berkeley) and Democrat State Senate leader Darrell Steinberg (D-sacramento) can milk campaign contributions from Wal-mart, Target, Home Depot Barnes and Noble, et al. who desire a competitive business advantage over Amazon, e-Bay and Overstock.com.
Look for these bills to come back over and over again as the Democrats milk them for all that they are worth – a bad deal for California.