The vast quantity of coverage of California’s recent use tax law has largely overlooked two key facts. First, the new law is not a “new tax,” but rather a new strategy for collecting a very old tax. Not even Amazon.com disputes the state’s ability to impose a “use tax,” a tax on the use of goods purchased from an out-of-state retailer. California’s use tax law has been on the books since 1935 and a 1939 US Supreme Court ruling in Felt and Tarrant Manufacturing, Co. v. Gallagher upheld the constitutionality of states’ use tax laws. California’s new law simply requires certain retailer to collect the tax. Historically, the state relied on consumers to report their out-of-state purchases and voluntarily pay the tax. This strategy has led to nearly universal non-compliance, as documented in a recent publication by the Board of Equalization, the agency charged with administering the tax. Just 0.42 percent of California personal income taxpayers report a use tax liability on their personal income tax return. In contrast, estimates suggest that more than one-third of the population shops on-line at least monthly. Thus e-tailers such as Amazon.com count on taxpayers’ noncompliance with state law as part of a deliberate business model, as we discussed in a policy brief published earlier this year.
The second infrequently reported fact relates to how the new law applies to Amazon.com. Most of the press coverage to date has focused on “affiliates” – California-based website operators that receive a commission for click-through sales made on Amazon. In fact, at the heart of this issue is the fact that Amazon.com owns multiple California-based companies. Under both the new, and arguably prior, California law these related firms provide the state with adequate grounds to require Amazon to collect taxes owed on purchases made by Californians. We mentioned several Amazon subsidiaries in our paper, but it turns out that the company’s California presence is far more extensive than we previously knew. Take, for example, a2z. a2z’s website prominently notes that it is “part of the Amazon group of companies” and that its “main sites are located in Orange County, CA; San Francisco, CA; and San Luis Obispo, CA.” Or, Alexa, another firm that identifies itself as an Amazon.com company. Alexa is “a growing and dynamic company, staffed by some of the smartest people in the industry… located in a place of unparalleled beauty: the Presidio of San Francisco.”
California’s use tax law gives our Main Street businesses a fair chance and helps collect revenues that are essential to the state’s future prosperity.
— Jean Ross