Why California Should Not Follow New York’s Internet Tax Plan

California is facing budget problems yet again, and once again state lawmakers are hoping to shake down Internet retailers as a fast source of revenue. A bill introduced by Democratic Assemblywoman Nancy Skinner (AB 153) proposes to force out-of-state businesses to collect tax if they use an in-state company to generate leads. It’s an idea that has been tested in New York and led to significant losses in that state.

“If advertising with California-based websites were to create a nexus in the state for out-of-state retailers, those retailers will simply chose to terminate click-thru advertising agreements with California-based websites,” said Patrick Gleason of American for Tax Reform. When New York passed a law similar to AB 153, Overstock.com cut contracts with online advertisers in that state. Bills like AB 153 “will eliminate an important source of revenue, which income tax is paid on, for many online entrepreneurs and other California-based organizations.”

It seems that by attempting to generate more income, Skinner could wind up killing jobs and diminishing revenue for California. So why target online sales? Ecommerce is growing for a variety of reasons and some businesses, like Barnes and Nobel, argue that Amazon.com has an unfair advantage over them because they do not collect taxes for states in which they are not based. The reality is more complicated than that.

Online shopping is clearly different from in-person shopping. When someone shops online, they typically have to pay a shipping fee. For instance, to get a pair of shoes shipped overnight from Zappos.com, the charge is $25—a much larger fee than the state tax. In those circumstances, it is the retailer based around the corner from one’s home that holds an advantage over the Internet vendor.

But even if everyone agrees that the Internet doesn’t automatically convey an advantage, some argue that it seems unfair that one company has to collect a tax for the government while the other does not. The reason for this comes from a Supreme Court ruling that says that states cannot force companies out of their jurisdiction to do their work. This makes sense since companies who do not physically reside in the state do not use government services, like police and firefighting, as the in-state business do. But again, even if everyone agrees with this, what about the so-called “tax-break” for consumers who shop with the out-of-state retailers? This is the crux of the matter.

Consumers are supposed to pay “use tax” on goods that they purchase from out-of-state retailers. Sometimes individuals are unaware of this requirement or they fail to do it on their yearly tax form. Governments have trouble enforcing compliance with tax law in an Internet age, and since governments are not willing directly to force payment of the taxes by targeting individuals or switching to an origin-based tax, they would rather ask Internet businesses to do it for them. This is what many businesses object to, and rightly so.

It is difficult enough to get a business running and profitable. Forcing businesses to do the government’s job is a huge additional burden that could break some companies. And of course, every time this issue comes up, it serves to remind Californians that they have the highest sales tax in the nation, not a distinction to brag about when state coffers are so empty.

Technology companies power California’s economy and provide much needed jobs. It is disappointing to see legislators again targeting this sector as a source of revenue. Instead legislators should make the state more hospitable to all entrepreneurs by lightening California’s onerous tax and regulatory burden. Legislators also need to get spending under control so huge budget deficits don’t cause panic and ill-advised money grabs.

This article was previously published at TechNewsWorld.com

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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