When it comes to Internet entrepreneurship, California is the place to be for aspiring Mark Zuckerbergs. Silicon Valley is known around the world as the technology mecca. The explosion of new technology in the last two decades has helped drive California’s economy and made it the center of the Internet-based business world. But California’s reputation as the home of innovative Internet technology is about to end—all because of the state government’s greed.
As part of a state budget deal passed late last month, Governor Jerry Brown signed a law mandating Internet-based companies collect a sales tax on all purchases from California residents. Proponents believe the mandate will bring in $200 million in revenue the government is missing as Internet-based companies refuse to collect such taxes.
A couple hundred million dollars is but a proverbial drop in the bucket considering the Golden State’s chronic billion-dollar budget shortfalls. And the long-term ramifications for this new policy of taxing Internet companies will only strengthen the argument that California is hostile towards businesses of all shapes and sizes.
For years, Internet companies outside of California have skirted the state’s sales tax by claiming that with no physical presence or “nexus” in the state, they were not required to collect a sales tax on purchases made by California residents. With no sales tax on purchases, Internet companies were given a competitive edge over brick-and-mortar businesses—something that undoubtedly fueled the massive growth of the online marketplace.
But lawmakers and the court system finally found a way to nail retailers like Amazon by considering affiliates, product developers or even marketers the physical presence nexus triggering collection of sales taxes. Affiliates are individuals within each state who earn a commission on sales they refer to larger sites such as Amazon.
New York was the first state to pass the so-called “Amazon Tax”—dubbed thus because its largest target is the international Internet retailer—and California quickly followed suit with Assembly Bill X1 28. Even as Governor Brown affixed his signature to the bill in June 29th, Amazon announced it was terminating business relations with over 10,000 affiliates within California. A state already grappling with nearly 12% unemployment lost thousands more jobs.
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In a recent article, California Board of Equalization member George Runner—one of the most vocal opponents of the Amazon Tax—listed dozens of online sellers who have terminated their relationships with affiliate sellers in California. Each of those companies represents hundreds if not thousands of individuals who made some part of their income via online sales.
But Amazon hasn’t thrown in the towel completely. Ten days after the Amazon Tax bill was signed, the company filed a referendum to take the issue before voters and repeal the law. Once again, the people—and business community—have been forced to turn to the direct vote of the initiative process because the shortsighted greed of the legislature is stifling economic prosperity.
How sad for California that the people have to once again sidestep their legislature in order to make meaningful reforms. Corrupt, greedy politicians and special interests have created such a spider’s web of gerrymandering and restrictive election financing laws that the only recourse the people have is direct democracy. While certainly not the most desirable means of governance, this is what it has come to in the former Golden State.
The implications of this epic battle between California’s government and retailers like Amazon cannot be overlooked. How ironic that one of the industries that caused the state’s economy to thrive and brought in such rich revenues for state coffers is now the very industry state leaders are driving away.
In fact, Amazon CEO Jeff Bezos once considered establishing the company’s corporate headquarters in Silicon Valley because it’s “the single best source for technical talent.” But knowing the company would be forced to collect a sales tax in its home state, Amazon opted for the tech-friendly alternative of Washington.
If only California legislators were wise enough to understand the ramifications of Amazon’s decision. Bezos knew the best talent was in California and could have created thousands of jobs there. But it was the government’s tax policies that drove the company into the arms of another state. Instead of settling for a measly $200 million, imagine the millions more generated by having even more Internet companies—and their accompanying jobs—based in California.
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