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Amazon vs. California

by Elaine Schwartz    •    Jul 17, 2011

According to the Seattle Times, in 1996, Amazon’s CEO, Jeff Bezos said, “You have to charge sales tax to customers who live in any state where you have a business presence. It made no sense for us to be in California or New York.” Amazon’s home? Seattle.

Bezos was referring to a 1992 Supreme Court decision that said states could not ask out-of-state retailers with no local physical presence to pay a sales tax. Consequently, Amazon pays sales taxes to Kansas and Kentucky, North Dakota, and Washington because it has stores or offices there. Amazon claims it has no physical presence in California.

Using a broader definition, California disagrees.

Because Amazon has relationships with in-state affiliates that direct business to it, California says that Amazon will owe local sales taxes. Amazon responded by eliminating those affiliate relationships. In addition, Amazon has petitioned California to schedule a June referendum. Once Amazon gets 500,000 signatures, voters can decide whether California can keep its e-commerce tax.

You can see that we have here a much bigger issue. Should e-retailers charge sales tax? Local retailers say Amazon has an unfair advantage. The state of California desperately needs more revenue. On the other hand, as a growth sector of the economy, should e-commerce receive favorable treatment? And, through local taxes, are states obstructing interstate commerce?

The Economic Lesson

Citing the U.S. Constitution’s Commerce Clause, in Quill Corp v. North Dakota, the U.S. Supreme Court sought to limit when states could tax out-of-state businesses. Here, you can see the Court’s decision.

An Economic Question: Referring to opportunity cost, agree or disagree with Amazon’s Los Angeles customers paying an 8.75% tax.

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