By Kathleen Pender
(Sales taxes are never a good idea, like all taxes they distort the economy and suffocate parts of it. That said, California goes out of its way to create the looniest, most complex tax laws since the old Soviet politburo.-RW)
California's sales tax rules have never been easy to understand or enforce.
For example, a ham bone for a dog is taxable, while a ham bone for soup is not. At a restaurant, mandatory gratuities for large parties are subject to sales tax, but tips given voluntarily are not. A hot coffee to go is not taxable, neither is a cold muffin to go. But if you sell them together for one price, the sale is taxable.
So it should come as no surprise that the state's controversial new law requiring large out-of-state retailers to collect tax on sales to Californians is convoluted and already being met with resistance.
The so-called Amazon tax was included in budget trailer bill ABx1 28 and took effect June 28. The Board of Equalization has posted guidance on its website that is next to unfathomable, even for sales tax experts. You can read it at sfg.ly/mh6SxF.
In a nutshell, the law attempts to increase tax collections and level the playing field between online and traditional stores by expanding the concept of nexus.
In California, the retail sale of tangible personal property is generally subject to sales tax, unless it is an exempt item. If a retailer has a nexus or connection with the state, it is required to pay the sales tax. It may collect the sales tax from the customer but even if it doesn't, it is still responsible for paying it.
If a retailer does not have a nexus in the state, it is not responsible for the sales tax. The buyer is supposed to pay it, in which case it is called a use tax. When individuals file their tax return, they are supposed to pay use tax on anything they bought from any out-of-state retailer that did not collect sales tax. Not many people do and it's nearly impossible to enforce.
So California, like several other states, is trying to expand the definition of nexus. The U.S. Supreme Court says nexus requires a substantial physical presence in a state, but that's not easy to define and is often challenged in court.
One state appeals court decision held that an out-of-state retailer that lets customers return products purchased online to an affiliated brick-and-mortar store in California has nexus in the state, says attorney Charles Moll, a partner with Winston & Strawn.
Companies such as Amazon.com and Overstock.com don't collect sales tax on purchases sent to California because they say they have no physical presence here, although they do collect it on sales to states where they do have a headquarters or certain other operations.
Hits 2 types of retailers
The new California law expands the concept of nexus to include two types of out-of-state retailers:
-- One is retailers that have a subsidiary or sister company that performs services in California in connection with products sold by the retailer, "including but not limited to, design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer," according to the BOE.
This would include, for example, a retailer that has some ownership in common with a company in California that designs its website or builds its products, but it would not include a retailer that hires an unrelated company in California to do these jobs.
Amazon has several subsidiaries in California including one that designed the Kindle. Theoretically the ownership of this company would require Amazon to collect sales tax on all sales to California. Amazon does not appear to be collecting sales tax on California purchases. It did not return repeated requests for comment.
-- It also includes any retailer that has an agreement with a person in California who refers purchasers to the retailer - through a link on a blog or website, for example - and receives a commission or other fee. These are sometimes called affiliate relationships (Amazon calls them associates).
However, this applies only if - over the past 12 months - the retailer's total sales in California exceed $500,000 and its sales in California generated by all of its California affiliates combined exceed $10,000.
If the retailer exceeds these thresholds, it is responsible for sales tax on every sale it makes in California, not just sales through affiliates.
Only about 2,000 of the estimated 22,000 online retailers in the United States would fall under the provisions of this new law, says Anita Gore, a spokeswoman for the BOE.
Although the new law was supposed to level the retail playing field, this exception still creates an imbalance between large and small out-of-state retailers.
Amazon and Overstock have both cut off their associate/affiliate relationships in response to this new provision.
The new law is expected to generate only $200 million per year in tax revenue, a relative pittance given the size of the state's budget. Moll says he would be shocked it if wasn't challenged as unconstitutional.
Read the rest here.
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