Taking on Amazon.com

Berkeley Assemblywoman Nancy Skinner wants the giant online retailers to stop cheating both California and independent booksellers.

Amazon.com is a goliath. Last year,
the company posted revenues totaling $19.2 billion, an increase of 26
percent during a steep recession. Yet Amazon rips off the state of
California each year by refusing to collect sales taxes on its
transactions. That gives the company a huge advantage over its
competitors, effectively allowing it to undersell traditional retailers
who are required by law to collect the tax. But the state’s independent
booksellers, who have been devastated by Amazon’s furious growth, are
fighting back. And they’re getting help from freshman Democratic
Assemblywoman Nancy Skinner of Berkeley.

Skinner’s first ever piece of legislation would effectively force
Amazon to start collecting sales tax in California and then transfer
those funds to the state treasury.

The Northern California Independent Booksellers Association, which
asked Skinner to sponsor the legislation, estimates it will generate at
least $55 million of revenue for California. That may not sound like
much for a state that just solved a $42 billion budget crisis, but the
independent bookseller’s primary interest is leveling the retail
playing field. “Amazon.com is the
Wal-Mart of online retailers,” said Hut Landon, the NCIBA’s
executive director. “This is an issue of fairness.”

Bay Area independent booksellers have been battling online retailers
over the issue of sales tax for nearly a decade. In 2000, they
sponsored legislation carried by Assemblywoman Carole Migden
that sought to force BarnesandNoble.com and Borders.com to start collecting sales tax.
The nation’s two largest bookstore chains fought the bill, arguing at
the time that their online divisions should be exempt because they
weren’t located in California and because they were separate entities
from their bookstores.

Migden’s bill passed both houses of the legislature on mostly party
lines. Democrats supported it; Republicans opposed, arguing that it
represented a “new tax.” But there was one key Democrat who stood
against the booksellers — Governor Gray Davis, who vetoed
the bill. Davis claimed it would harm the growth of the World Wide Web
and California’s role as an e-commerce mecca. “Imposing sales taxes on
Internet transactions at this point in its young life would send the
wrong signal about California’s international role as the incubator of
the dot-com community,” he said in his veto message.

But the independent booksellers didn’t give up. Several years later,
they convinced California’s Board of Equalization, the state’s taxing
agency, to take Borders.com to court.
In 2005, a state appellate court ruled against Borders, saying the
state had the right to force the company to collect sales taxes, even
without Migden’s bill, because of a 1992 US Supreme Court decision. The
high court’s decision stated that out-of-state retailers must collect
state sales tax if they have a presence or “nexus” within the
state.

The California appellate court ruled that Borders’ bookstores in
California represented that “nexus.” Ever since, both Borders.com, which is now operated under
contract by Amazon, and BarnesandNoble.com have charged sales
tax to their online customers from California, and to customers from
every other state in which they have bookstores. “The Borders case made
it clear to everybody that when people buy from Borders.com, they’re buying from Borders,”
said Lenny Goldberg, a Sacramento lobbyist for the Northern
California Independent Booksellers Association.

Then last year, independent booksellers in New York decided it was
time to target Amazon, which now not only dominates the independents,
but the chains as well. The booksellers convinced New York state
legislators to force Amazon to start charging sales tax there. Amazon
immediately sued the state, arguing that it was different than Borders
and Barnes & Noble because it has no retail stores.

But in January, a New York judge ruled against Amazon, saying that
the company did have a “nexus” in the state because of its unique
relationship with thousands of “affiliates.” A major part of Amazon’s
business model is to contract with and pay other web site operators to
refer Internet users to Amazon. The New York judge ruled that these
affiliates fell within the Supreme Court’s definition of “nexus.” “They
do meet the nexus definition,” said Oren Teicher, chief
operating officer of the American Booksellers Association, which
co-sponsored the New York law. “The affiliates are acting as sales
agents.”

Amazon has hundreds of affiliates in California too, and Skinner’s
bill is patterned after the New York law. Skinner said she decided to
go after Amazon in her first bill because “local businesses are
struggling to keep their doors open.” Amy Thomas, owner of
Pegasus and Pendragon Books of Berkeley and Oakland, said it’s about
time a state politician stood up to the online giant. She said she has
countless stories of customers coming into her stores, researching
books, and then buying them on Amazon. “You help a person for fifteen
minutes, tell them you can get the book for them, and then they say,
‘Let me call my husband to see if he’s online,'” Thomas said.

Amazon is expected to appeal the New York ruling, and to fight
vigorously against Skinner’s bill. Local booksellers expect Republicans
will make the same argument as before — that it’s a new tax, even
though it obviously isn’t. National anti-tax groups, such as Council on
State Taxation, aren’t even making that contention. They believe that
if states want to tax online retailers, they need to get Congress to
pass a law that would allow them to do it.

In California, the wild card is Governor Arnold
Schwarzenegger
. Clearly, Davis’ argument about the “young” Internet
is now laughable. Amazon is the biggest player on the block by far, and
it’s ridiculous that California continues to shortchange itself while
giving the massive retailer a significant advantage over its
competitors. That’s especially true when more and more are closing
their stores every day during the worst economic downturn since the
Great Depression.

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