Thursday, June 30, 2011

Biting the Hand

In a beautiful demonstration of how little the American liberal understands about business, revenue and the economy, the Governor of California has signed into law a piece of legislation that shows his undeniable kinship with the Messiah, Harry Reid, Dick Durbin, Chuck Shumer, Nancy Pelosi, et. al.

Tax on Affiliate Internet Sales to Guarantee Net Revenue Loss

We went through something like this in Texas last year. The issue was collection of sales tax on internet sales by Amazon that are handled by their massive fulfillment center within the state. The rationale has been that sales tax can be imposed on an internet sale when the retailer has a brick/mortar outlet in the state.

That makes sense if you are dealing with a store-front that sells product to customers who walk in the door and then also offers sales through internet orders. You have a mechanism in place for the accounting, incorporating, consolidating and submitting of the tax to the state and local governments. It is all quite clear with regard to what the local jurisdiction tax levies are.

When you take an entity that has no open retail door but only an internet portal, then it gets more complex. The "sale" takes place at the location of the host server in most estimations, not the point of boxing the product and shipping it which could be many states away.

In a fulfillment in Texas, the state claimed that the sales were occurring in the shipping center. If you tax the product in TX, what does the customer in Ohio or Wyoming owe to their state? Do you have an expectation of collection to both states? That clearly would be an unfair burden on the consumer and maybe even merit the Revolutionary War cry of  "taxation without representation."

Do you require the online retailer to maintain a data base and computations for all the millions of combinations of tax levy that comprise sales tax throughout the land? With changes occurring every election cycle, that would be an onerous task.

Can you possibly ignore the fact that this would hamper sales and cut revenues? Is it unclear that this would raise costs to purchasers and hence impact the economy?

What drove the point home in Texas was a simple threat by Amazon to close the fulfillment center and move the entire 1000 job workforce to another state. That was a relationship that California might want to review.


The Donald said...

As Barbara Billingsley said, "I speak jive."

[Texas] Sec. 151.008. "SELLER" OR "RETAILER". (a) "Seller" or "retailer" means a person engaged in the business of making sales of taxable items of a kind the receipts from the sale of which are included in the measure of the sales or use tax imposed by this chapter.(b) "Seller" and "retailer" include: //...//and(5) a person who engages in regular or systematic solicitation of sales of taxable items in this state by the distribution of catalogs, periodicals, advertising flyers, or other advertising, by means of print, radio, or television media, or by mail, telegraphy, telephone, computer data base, cable, optic, microwave, or other communication system for the purpose of effecting sales of taxable items.

Bolding mine. I am aware of, but not intimately familiar with, this issue, from news sources. It's been long established that if a retailer maintains a physical presence in a state, then even merchandise that said seller ships into that state from beyond its borders is taxed. Thus, back when Sharper Image had mall stores in Northeast and Riverwalk malls, even shipments made into Texas were taxed.

I suspect there's a marriage of convenience on this issue between stocking dealers and the taxing authority - the former wants to try to level the playing field against lower-overhead competitors, the latter wants the Benjamins (reason is not important).

In the instant case, my question would be whether the fulfillment center was a third-party logistics (3PL) provider, or a direct subsidiary of the principal. One would surely think that a prominent company would've had top-notch accounting consultants to set up a strong firewall for exactly such purposes, but - it could be conjectured that if maybe the logistics function was not perceived to be 'arm's length', the taxing authority may have concluded that the seller had nexus in the state for purposes of imposing the sales tax.

In paragraph 5, depending on the level of aggressiveness of their state taxing agencies, OH and WY residents, absent any other nexus in their states, would possibly be responsible for 'use' tax, but the seller would not be responsible for collecting it. In no case would they owe sales or use tax to multiple states. I don't know if any states are aggressively pursuing use tax on mundane sales or not. Buy $25,000 worth of furniture in France, or a $250,000 A-36 in Tennesee, not for resale, and the taxman will be contacting you.

The short answer to the question posed in your third-to-last paragraph, if there is a determination of 'presence', is 'yes'.

It's pretty much a given that the various taxing agencies, whether federal, state, county, local, utility, etc. are pulling out all the stops, even creatively to maximize their collections.

Speaking of which, most collections and remedies occur under civil, not criminal, law, meaning that 'innocent until proven guilty' doesn't apply.

It's getting to the point that one's best rate of return is to bury Eisenhower dollars in a Folger's can in the back yard, if you don't want someone snatching it.

So long as that Bush's Baked Beans dog isn't watching...

The Donald said...

Edit: Tennessee!