Legislature should ctrl+alt+delete Internet tax

Internet users used to be greeted by a voice announcing, “You’ve got mail!” Last week, Gov. Jerry Brown and the California Legislature replaced that with, “Pay up!”

The new state budget is based on unrealistic revenue assumptions, one of which is the $317 million that’s expected from a new Internet tax. Sacramento pols saw this as a twofer: increasing tax revenue while leveling the playing field for brick-and-mortar stores that are forced to pass the state sales tax on to customers while competing against online retailers that skip the sales tax.

Unfortunately, the new tax is unlikely to bring in anything close to $317 million, and could well result in less tax revenue and higher unemployment.

Rather than pay the tax, Amazon.com, Overstock.com and other out-of-state online retailers have cut their connections to this state by removing the California affiliates from their click-through referral programs. About 25,000 California affiliates, ranging from lone bloggers to midsize companies, are now losing revenue. Many will either go out of business, lay off employees or move out of the state.

Kevin Johnson, CEO of Ebates.com, which has 44 employees in San Francisco, said, “I think if we lost 25 percent of our revenues, it would have a real impact on our staff and on our business.” Savings.com, a Santa Monica company with 80 employees, is thinking of either laying off up to 20 percent of its workforce or moving to Nevada.

California affiliates have been contributing about $124 million per year in state income taxes, which will now be reduced as they downsize or leave. Meanwhile, state coffers are not receiving one extra penny from Amazon, et al.

The dispute likely will be headed to court, possibly resulting in hundreds of thousands if not millions of dollars in litigation expenses before it’s finally settled. Whether it’s legal for a state to tax companies that are not physically in that state and don’t receive any services from that state could go all the way to the Supreme Court after years of rulings and appeals in lower courts.

The sad thing is that all of this was predictable, because it has played out in other states where lawsuits have been filed and very little if any extra tax revenue has come in from what has been dubbed “The Amazon Tax.”

This economic blow to thousands of California small businesses is not likely to help lower the state’s 11.7 percent unemployment rate, which is second-highest in the nation, or help reduce the state’s enormous debt.

Instead of punishing businesses and trying to force Californians to send more money to Sacramento, state legislators should be finding ways to improve the business climate by reducing taxes, lowering regulations and letting the free market and entrepreneurial spirit embodied in the Internet thrive.

State Board of Equalization member George Runner said it well in his June 17 letter to Gov. Jerry Brown, urging him to veto the tax bill: “California should extend a welcome mat to cutting-edge entrepreneurs and small businesses. Job creators need fair tax policies, regulatory stability and clarity from government.”

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