California’s War on Entrepreneurs

California is proving once again that it’s the worst place to do business in America.

This time, the state is attempting to collect up to eight years of back taxes from Amazon sellers whose products were temporarily stored in Amazon warehouses throughout the state.

Not content with a projected budget surplus of $21.5 billion in 2019, the state wants to swell its coffers further by strictly enforcing a 2012 law that compelled online retailers to collect taxes from their customers if the company had any kind of physical presence in California.  So, if sellers used Amazon’s fulfillment services and their products happened to be stored in one of Amazon’s warehouses in the state, they must pay back taxes on those products or face fines of up to $5,000 and time in prison.

The sellers, who didn’t have control over where their products were stored and didn’t know they owed back taxes, are asking for relief from California’s new Department of Tax and Fee Administration.

Treasurer Fiona Ma, who supports the sellers, asked Gov. Gavin Newsom in a March 8 letter “to spare those who will lose their business if they comply with (the state’s) demands. . . . As a matter of sound policy and consistency, I urge you to ensure that third-party sellers whose goods are sold via online retail platforms — many of whom are women and minority-owned businesses — are not subject to sales tax, either prospectively or retroactively.”

The state’s tax department has touted its initiative to collect online sale tax since 2017 when Director Nicolas Maduros asked state employees to go through Amazon’s website to find companies that offered same-day delivery but didn’t pay sales tax.  His theory: companies who were offering same-day delivery probably had inventory somewhere in the state, which meant that the state’s 2012 online tax law applied to them.

There’s a certain “ick factor” at the thought of state workers going through Amazon’s or eBay’s website to hunt down sellers.  Originally, it was “hit or miss,” said Ma, but once the department obtained the records of third-party sellers from Amazon and eBay, “things went crazy.”

It’s estimated that there are 180,000 sellers who had inventory in California and Maduros said that these companies owe “hundreds of millions of dollars.” “It’s not an area we can afford to overlook,” he said at a hearing last year. [See $21.5 billion budget surplus]

The Sacramento Bee reported that Mindy Wright of Renton, Washington, in a letter Ma shared with Newsom, said “We are facing tens of thousands of dollars in back taxes, penalties and interest. . . . This alone will force us out of business and into bankruptcy. We just do not make much money and we are distraught and frightened.”

In anticipation of the U.S. Supreme Court’s Wayfair decision, Wright and her husband, who sells home furnishings and other items through sites like Amazon and eBay, got a California business license and began collecting California sales tax from her customers in the state. But she had no idea that before Wayfair, she had to collect taxes if she had products warehoused in the state.

“We’re just good people. We thought we were following the law, and it’s not nice to have people say we’ve been breaking the law since 2012. We’re not bad people,” said Wright. “Even if they put us on payment plan, we’ll pay until we die,” she said.

It’s bad enough that the state is waging a war on small businesses with red tape and high taxes, but now it’s taking the campaign nationwide.

In an upcoming study on entrepreneurship, PRI senior fellow Wayne Winegarden writes that there are signs that the entrepreneurial sector is stagnating in America.  The Kauffman Foundation, citing its own research and drawing on U.S. Census data, concluded that the number of companies less than a year old had declined as a share of all businesses by nearly 44 percent between 1978 and 2012.  The Brookings Institution, also using Census data, found that the number of new businesses is down across the country and that more businesses are dying than are being born.

“The power to tax is the power to destroy,” wrote Chief Justice John Marshall.  California needs to end its war on entrepreneurs before it’s too late.

Rowena Itchon is senior vice president at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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