Does saving money by shopping online still ultimately cost you in the end?
In small towns such as those that make up the Eastern Sierra, it’s quaint to promote shopping locally and feed the image of happy inhabitants supporting one another. In a tough economy, however, when people are trying to save a dime more than ever, it may not always be financially realistic.
In good times and in bad, shoppers often turn to the Internet for purchases, especially when those online retailers don’t charge sales tax. No sales tax, especially on large purchases, can lead to hundreds of dollars in savings. Online shopping, however, also leads to less money spent in local shops and less sales tax revenue in local and state coffers (which may or may not be a bad thing in your book). In the worst case scenario, those local shops close their doors. In another not so good scenario, the shops may remain, but local services are likely to be diminished and new community projects simply remain plans on a drawing board.
A piece of state legislation currently on the table hopes to give on-the-ground businesses a better chance at competing with Internet companies. AB 153, introduced by Assemblymember Nancy Skinner (D-Berkeley), would “close the current loophole in California tax law which has allowed out-of-state companies to avoid collecting California sales and use tax,” according to Skinner’s website. “Out-of-State online retailers designed their business model to avoid collecting sales tax. Out-of-state, online-only retailers cost state and local governments billions in lost tax revenue. That means that unpaid sales taxes from these retailers could help make sure we have teachers in the schools, cops on the streets and emergency personnel in firehouses.”
Currently, online companies such as Amazon do not have to collect state sales tax unless they have a nexus, or physical presence, in that state. The Supreme Court made this ruling in 1992 in what has become known as the Quill decision. Quill, an office equipment supplier, was challenged by the state of North Dakota to pay sales tax for the merchandise it was selling to residents within the state. The Supreme Court however, ruled that since Quill did not have a nexus in North Dakota, it would be unconstitutional to make the company pay sales tax to that state.
Now, however, politicians are arguing that affiliates count as a nexus. Affiliates are essentially salespeople for online companies. Someone who is running a website can put a link to a company like Amazon on their site and if a customer finds their way to Amazon through the affiliate’s site and makes a purchase then the affiliate receives a commission.
In states such as Illinois, where a law similar to AB 153 has already been passed, Amazon has simply ceased doing any business with affiliates there in order to skirt the issue. Colorado, New York, North Carolina and Rhode Island also impose some version of Internet sales tax, according to The Wall Street Journal.
With California currently drowning in $26 billion of debt, Skinner has pulled the idea of e-fairness out of the closet, dusted it off, and repositioned it as a way to save the day. Critics argue that even if the bill were passed, the amount of sales tax that would actually be collected would be a drop in the bucket at approximately $500 million per year. Then there’s the question of the negative consequence of California affiliates losing portions of their income, should Amazon and other big box stores opt to drop them in order to avoid a nexus.
Locally, however, some businesses are excited at the prospect of being able to compete with online sales.
“It would be a good thing,” said Dave Leonard, owner of the Booky Joint. “It would change consumer habits because they [Internet companies] couldn’t sell at a loss.”
Craig Hansen who owns and operates Mammoth Business Essentials, which not only sells office supplies but also serves as an alternative mail center in Mammoth Lakes, sees first hand the large amount of Internet shopping going on when packages are delivered for his patrons to pick up.
“There is a lot of Internet shopping and price is the biggest motivator,” Hansen said. “If they [consumers] had to pay sales tax it would make a difference.”
Or would it? One local, Dave Levy assessed that his shopping habits would only change “in the case that it affects the out of state purchase cost to the point where it was no longer the least expensive option.”
Another local consumer and business owner, Clayton Mendel, was torn between his positions of buyer and seller.
“I’m split on this,” Mendel said. “I don’t like it as it is another piece of unnecessary legislation. Currently individuals are supposed to be paying use tax on things they buy online from out of state. However, as a business owner in town, I like it, as it helps close the price gap between buying local versus ordering online. [The state] already makes me collect sales tax on firearms people order from out of state anyway. [Mendel is the owner of Eastern Sierra Armory].”
On a more political note, Mendel said he dismissed the notion that the state would be able to fix the budget through taxing people and businesses.
“All it ends up doing is driving people, businesses and revenue out of the state,” he explained. “Maybe they should look at cutting expenses. A good place to start would be with the full time legislature that we pay to come up with crap like this.”
Skinner’s website, however, promotes the notion that sales tax helps support towns. It goes toward infrastructure needs and wish lists of things communities would like to see built. In Mammoth Lakes specifically, shopping locally rather than online means more money for parks, trails and recreation since Measure R dollars are collected on sales tax.
“There is so much we want to do, but we can’t without tax,” Hansen said.
Big Brother and the Use Tax
Warning: If you’ve never heard of the Use Tax Law and don’t want to have to worry about reporting something else on your income taxes, stop reading now.
The California Use Tax Law has been in existence since 1935. It is meant to be a safety valve for the state when it doesn’t receive sales tax on a purchase, and to act as a stopgap to keep people from buying out of state in places where there is no sales tax (i.e. Delaware, New Hampshire, Montana, Oregon and Alaska). When you shop online at stores such as Amazon, you are supposed to report these purchases on your income tax return so that the state can collect Use Tax from you. Many people ignore this tax since often their online purchases do not add up to amounts that would be noticed by the state.
AB 153 would make businesses selling the product responsible for collecting the tax, which many people feel is the way it ought to be. The state, however, continues to grow more desperate to collect taxes and on a parallel track to AB 153 is looking at a Big Brother-type operation that would track online purchases to collect Use Tax.
According to a May 3 article at CBS Sacramento.com, the State Board of Equalization recently reviewed a controversial plan that would police online purchases.Under the BOE proposal, California would be authorized to spend up to $10 million to hire private vendors to track down what you purchase over the Internet. The controversial topic has been dubbed as a way for the state to hire “Internet Police” and another case of “Big Brother” looking over your shoulder.
One member of the BOE, George Runner, who was interviewed in the CBS article, didn’t think the proposal had any legs.
“One of the ideas is, ‘Well, we think there might be some people who will sell us data,’” Runner warned about the proposal. “That will tell us what kind of credit card transactions or private transactions that a Californian may have made in purchasing something out of state,” he said in the article.
Supporters of the proposal think it could generate up to $1.1 billion in uncollected taxes, but because of the controversial nature of the topic, the BOE has pulled the item from its calendar for now and asked for further study.
