The lengthy dispute between the State of California and Amazon took a dramatic turn on September 10th when state lawmakers and the online retail giant agreed to a compromise bill that will put an end, pending Governor Jerry Brown’s approval, to the drawn-out sales tax controversy—at least for now. Under the new measure, Seattle-based Amazon will begin to collect sales tax from customers in California in September 2012 barring future federal legislation. Given the amount of effort Amazon exerted during its battle with the Golden State, this concession may surprise many.
Currently, California is one of 24 states that permit referendums, which are proposals brought by citizen petition, to repeal a law previously enacted by the legislature. In California, 500,000 signatures are needed to push issues onto a state ballot. Prior to the agreement, Amazon had already spent $5.25 million on its campaign to obtain the necessary number of signatures. The campaign reflected Amazon’s belief that voters, if given an opportunity, would support the repeal of the tax law. However, as part of last Friday’s deal, Amazon will ditch its campaign and drop the referendum effort.
Had Amazon continued with, and succeed at, its efforts to bring the referendum to the ballot next June, voters would have faced a divisive issue with many considerations. From a legal standpoint, this is an issue of whether Amazon falls under statutory guidelines that mandate the company to collect sales tax. Under federal law, states can tax sales only if the seller has a physical presence or “nexus” in the state. The definition of “nexus” is left to the states. The California legislature, seeing the approximately 25,000 Amazon affiliates located within its state, embedded within its statute a definition of “affiliate” that established a nexus. In response, Amazon cut off its affiliates in California so as to fall outside the scope of the statute. In doing so, can and should Amazon effectively evade charging its California customers with sales tax?
Not surprisingly, there are also political and public policy components to the dispute. Many politicians have framed the issue with respect to tax policy. Republicans call the online sales tax law yet another attempt to raise taxes, whereas Democrats justify the tax increase on the notions that California needs the tax revenue to fund public jobs. While the amount of annual tax revenue to be brought in by Amazon is disputed, low estimates generally come in around $200 million. For a state with mounting budgetary problems, $200 million could prove useful.
Finally, for voters, this may have drastic bottom-line consequences for their own consumerism. Much of the appeal of buying from Amazon comes from 1) the retailer’s large variety of products and 2) its lower prices. Amazon is able to reduce bottom-line prices to consumers in many states by avoiding the imposition of sales tax. In the long run, saving on sales tax for individual purchases adds up. And if the issue ever saw the ballot, it would come as no surprise if voters rallied against the tax. After all, money talks.
As a result of the recent deal, voters will probably not see issue on the ballot next June. That, however, is no guarantee that this issue is dead. It remains to be seen how the two sides act next September when the tax dollars begin to move.
Nathan Yu is a first-year student at William & Mary Law School.