California: will how we solve the inequity of sales tax cause jobs to leave?

It’s gotta be tough to be a Californian politician. Every year we’re $15 billion in debt and already we’re seeing that they are firing cops, firefighters, school teachers, and others. Even dangerous criminals are getting put on the street.

So of course politicians are looking at the Internet and its inequitable sales taxes as a solution. Here’s how they are unfair:

I used to help run a camera store in San Jose. If I sold you a Canon 5DMKII for, say, $2,500 I’d have to charge you 9.250 percent sales tax, which comes out to $231.25. But if you bought it off of Amazon or from BH Photo you wouldn’t need to pay that (yeah, I know, you are SUPPOSED to pay sales taxes on pretty much everything you buy, but be honest, how many of us pay that if you buy on the Internet. Almost no one).

So, this system is inequitable and is having HUGE consequences on local stores. Of course, that now means Walmart, Target, and other “big box” retailers. Funny, they didn’t care about the local stores when THEY disrupted the marketplace with their lower overheads (which is why the camera store I worked at is no longer in business) but now that their businesses are being threatened they are caring all of a sudden and spending BIG BUCKS lobbying our politicians.

And they are finding welcome ears. Politicians are sponsoring bills all over the place (they estimate that in California alone taxing Internet businesses could collect more than a billion dollars a year). This morning I listened to what they are doing at both state and national levels and it’s pretty clear we’re going to see rules massively changed so states can enforce their tax rules.

The problem is, as Keith Posehn blogged, this could have devastating consequences for a raft of startups.

Go read Keith’s post. It’s eye opening.

Is Silicon Valley about to see a good chunk of its startups done away with to protect the business models of out-of-state retailers (neither Target, BestBuy, nor WalMart are located here)?

All so California politicans can try to solve our government’s budget crisis?

Who will protect our jobs? Hint: no one.

About Robert Scoble

As Startup Liaison for Rackspace, the Open Cloud Computing Company, I travel the world with Rocky Barbanica looking for what's happening on the bleeding edge of technology and report that here.

29 thoughts on “California: will how we solve the inequity of sales tax cause jobs to leave?

  1. Interesting stuff.  I moved to Nevada with a ton of business owner friends over the income taxes.  My corporations are there now too.  I suppose as more purchasing moves on line this issue will become bigger.  I dont know if I’m right but I’ve always thought that saving money in taxes in one area help provide jobs which create more income tax in another area.  If I buy a camera online and save taxes, wouldnt that give me more money to spend locally?  I dont know, just a suggestion.  Wonder if there is a way to measure that if one tax saving complements another.

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  3. There is a way around this. 

    In Europe, we pay City tax which is then funneled back into the economy. 

    And as most city tax comes from tourists, it doesnt hurt the locals. 

    Could that work?

    Ivan

  4. 2 things:
    1. Isn’t it really about california has a spending problem not a revenue problem?
    2. The supreme court has ruled you cannot tax out of state businesses. How is purchasing something online from out of state any different from driving to a state with no/lower sales taxes and bringing it back with you. You don’t pay sales taxes in your home state in that situation.

    1. The ruling meant that a state cannot force out-of-state businesses to collect sales taxes.  That’s different than the CA requirement that sales of tangible goods (subject to a ridiculous number of less than clear rules) are subject to sales tax.  Out-of-state purchases consumed in state are supposed to reported on your income tax form.

  5. I don’t think this is about Wal-Mart or Best Buy or Target or Amazon. I don’t think it’s about California’s financial situation either. I think it’s strictly about Keith Posehn beating his own drum. First of all, Keith’s “blog” – a Tumblr, actually – doesn’t allow discussion. And second, the posts are tagged with phrases like “stupid politicians”, “jerks”, “affiliate tax”, and “startup killer bill”.

    It may very well be a bad bill – I haven’t taken the time to read it, given that I’m an Oregonian and it’s not like we don’t have finance discussions of our own to worry about. ;-) But I don’t think this is about anything other than affiliate marketing as practiced by Keith Posehn.

    1. Sorry you feel that way, but that isn’t what it is about. My business is in danger and so are others. No one else has sounded the alarm about this yet, so I’m not going to sit around and wait.

      And yes, you can ask questions, tweet at me, whatever. I don’t have anonymous questions allowed on my tumblr blog but anyone who wants and has an account can ask, post at me, etc. I did just add Disqus as well for good measure :)

  6. Closing one loophole (like buying your camera tax-free on Amazon) will only open another. Actually, it already has. Many Californians shop tax-free online using forwarding services in Oregon (where there is no sales tax). Just send your order to Oregon and then have it forwarded to you in CA. Tax-free. :) See: http://bit.ly/mRILaE

  7. Hi Bob, unfortunately this isn’t about paying. The legislation is pushed by Wal-Mart, Best Buy, Target and Home Depot. Their goal here is to get a dig in on Amazon and they don’t really care who gets caught in the crossfire. As we’ve seen in other states it has a net loss in revenue because startups/affiliates leave the state and the state loses the money they bring in without getting a dime in sales tax.

    I agree that they should pay sales tax, but this bill doesn’t get them to do that. It openly allows the biggest of the out-of-state retailers to dodge it :(

  8. Pretty much. It means that almost any manner of electronic representation *could* be considered nexus. If you’re out of state you could be on the hook and if you are a startup in CA, you might lose your advertisers, strategic partners, clients, etc.

  9. Robert, when we were kids, California hadn’t passed Proposition 13 and was relatively well funded (even if inequitably so) by property taxes.  Then there was a “tax revolt” and Prop 13 passed, but just made taxes inequitable in a different way.  Ever since, we’ve been suffering the shortfalls.  I’m sure it wasn’t as simple as that, but it’s clearly a factor.  Our education system is in shambles, and that’s the linchpin of everything.  Like you suggested, I don’t want to see CA losing more of its protectors and educators. Something’s gotta pay.

  10. If “Main Street” in California is at such a severe competitive disadvantage, how about LOWERING their state sales tax??? Or even dropping it?

    As an example, Colorado sales tax revenue is about 15% of the budget. You could easily drop it for everything but, say, restaurants and other “service” industries, major appliances and automobiles. Thus you pay sales tax on things that require a physical presence, or items too large to ship practically.

    You then slightly increase taxes elsewhere to compensate.

    Bingo. Most goods sold on “Main Street” are no longer at a competitive disadvantage due to sales tax.

    Of course, the states won’t do this, because the problem isn’t that “Main Street” is at a competitive disadvantage.

    What they really want is access to yet another revenue stream, paid by the consumer.

  11. Earth to Robert: Distant businesses that have no point of presence in CA don’t get any benefit from local schools, roads (etc).  Local businesses do get that benefit.  This isn’t hard, unless you turn your brain completely off.

    1. Um, last I checked Internet businesses needed roads to ship products to consumers, needed smart people who make money to buy them, needed Internet lines to get orders on, etc etc. Seems they get lots of benefits that taxes would pay for.

      1. If you assume that only big businesses exist, perhaps.  For any small business that wants to sell online, this is a complete halt to that.  In any cost/benefits scheme, this is a loser.  Heck Robert, CA is $15B (actually more, but we’ll use that) in the red.  You say this will bring in $1B.  

        Umm, the math kind of shows how pointless that is.  It’s time for Californians to wake up and realize just how stupidly high the rate of state spending is.  Tell you what – fly to Texas.  Ponder the beautiful highways, the low tax rates, and the much healthier economy for a bit.  Then go back to CA, the crumbling highways, and the stupid plans for trains to nowhere.  

        Maybe somewhere along the way, you’ll figure it out.

  12. Robert, thanks again for the post about this and the help getting the word out!

    I wrote an update on the post I made, but here is the basic summary:

    So, with the help of the Performance Marketing Association, I went to a lobby day to drum up some opposition to this bill. Overall, things went alright and we got some good responses, but the bill itself is still in play. Right now the most critical thing is getting startups AND VC’s to voice their opposition to the bill and how it can hurt them. If you want to help out, please tweet at me (@kzorz) with the hashtag #nosb234 and I’ll follow up with you.There will be a hearing later in June, so the more people that show to tell the legislature how bad this bill is, the better the chance we can kill it!

  13. Don’t worry I’m sure they will just pass an amendment repealing the law of unintended consequences… California has to make some really hard and painful choices. Electing people that are just going to pretend to do simple things and expect it to fix complicated problems is going to get nowhere.

    But hey, what do I care, I left California for Nevada 5 years ago knowing full well things were alredy unsustainable there.

  14. How does this bill benefit Wal-Mart, Target or Best Buy? And where does Amazon stand on this? A while back, Colorado passed some kind of sales tax bill and Amazon responded by shutting down all the affiliates in Colorado.

    Personally I think “affiliate marketing” and “monetizing blog traffic” are a waste of time. If you’ve got the kind of traffic that can pay a living wage that way, you’re smart enough to make more money some other way. ;-) But yes, for those who do make a living from affiliate marketing / blog advertising, tax law changes and getting shut down by Amazon are going to mean the difference between life and death.

    1. If you buy stuff online, and don’t pay sales tax, that’s a HUGE subsidy for Internet businesses that definitely hurt Walmart, Target, or BestBuy.

      Amazon is against sales taxes. They are benefiting from this subsidy.

      1. Subsidy?  According to Bing this is defined as 
        money given by government: a grant or gift of money from a government
        to a private company, organization, or charity to help it to function
        help with expenses: a monetary gift or contribution to somebody or
        something, especially to pay expenses

        So what you are saying, in essence, the government is giving citizens/Amazon money each time Amazon doesn’t collect a sales tax.  I going to call up the tax office right now and thank them for Allowing me to keep my hard earned money..please…

        Amazon has no presence in California(or in my case North Carolina) why should they be required to collect the sales tax for such states?  This is akin to taxation without representation. 
        I saw your post that said internet businesses use the roads to get the goods to the customers, this is kind of true.  The shipping company is using the road.  The same shipping company that put local gas in their vehicle’s tank, the same gas that is taxed by the state, which pays for the road.
        You also stated that people do the purchasing..um, people pay income taxes on their wages(unless in an income tax free state).
        Finally, you also stated the orders were placed over “internet lines.”  I’m assuming you mean cable/Telco lines.  I’m not familiar with a state paying to put in the cable or telco lines, but I am familiar with a private company paying to put those lines in.  The same private company that had to pay for the materials(taxed) to build the lines, that had to pay for the labor(taxed) to put those lines in, that paid for the land(taxed) to put those lines under, and finally that paid for the equipment(taxed) used to put the lines in. 
        Once the installation is done, the company still has to pay taxes on those lines, which they pass on to me, in the form of my ISP bill-which itself is taxed by the state(and some times local governments.)
        It seems to me that every step of the way, the state got some form of taxes.

        Most of the budget shortfalls are caused by a spending problem.  If the states would cut back on their spending(like most private business/individuals have to do) then there would be no need to get more money from taxes.

  15. Not quite “no one” … I actually do give my tax agent an estimate of what I bought online.  I don’t want to mess with the FTB.  I have found the IRS to be really nice folks by comparison.

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