Illustration by Bloomberg View
Illustration by Bloomberg View

There are lots of good reasons to shop online, but dodging sales tax shouldn’t be one of them. Inc. is battling the authorities in its largest state market, California, over this principle. The good arguments are on the Golden State’s side.

Online stores rang up more than $170 billion of purchases last year, accounting for about 9 percent of all retail sales. That’s a far cry from these merchants’ tiny start in 1998, when Congress granted a three-year reprieve from taxation, believing that the fledgling Internet sector needed help getting started.

That preferential treatment has since been extended several times. Yet Amazon last year rang up more than $34 billion in sales, with more than $1 billion in net income. Given online retailing’s current clout, it is time for these companies to play by grown-ups’ rules.

Until late June, Seattle-based Amazon enjoyed a convenient double identity in California. The company based its A9 search-engine project in Palo Alto. Designers of Amazon’s Kindle book reader worked in Cupertino. Thousands of Californians became Amazon associates, drumming up sales in return for a small cut of proceeds.

For sales, however, Amazon played the stranger. It deemed its online store to be an entirely out-of-state operation, unhampered by California retailers’ obligation to charge state sales tax on orders. As a result, even if physical stores and Amazon charged identical list prices for a toaster, a book or a deck chair, Amazon’s tax-free pricing made its wares about 8 percent cheaper.

Angry Retailers

Brick-and-mortar retailers have been fuming about this disparity for years. “We’re at a huge competitive disadvantage with online retailers,” says Bill Dombrowski, president of the California Retailers’ Association. “It’s bleeding us.”

California’s fiscal experts aren’t happy either. State Assemblyman Charles Calderon estimated that California was missing out on $83 million a year in sales tax that wasn’t being collected by Amazon. (The state asks taxpayers to compute their online tax obligations as part of annual income tax filings, but hardly anyone does.)

In the spring, the California Legislature passed a bill that defines Amazon as having a California presence, with an obligation to collect state taxes.

Amazon’s Rematch

Now, having lost in the legislature, Amazon wants a rematch. It said this week that it will start gathering signatures for a referendum, probably in February, on whether the new sales-tax law should be repealed. If voters cast their ballots simply to avoid paying sales tax, Amazon could win.

It’s important to remember, though, that sales tax isn’t just a nuisance charge you pay every time you eat at a restaurant, buy a T-shirt or get your car’s oil changed. In the 45 states that charge sales tax, these levies are a major way of paying for roads, police, teachers and other services.

While Amazon rings up brisk sales in all states, it collects taxes in only five, including New York and Washington. It provides some tax-bill notices for four others. To limit its tax footprint, Amazon has situated many of its warehouses and call centers in thinly populated or low-tax states.

There is nothing wrong with that; under the current rules, it’s clever tax planning. But it speaks to an advantage that Internet retailers no longer need. As Amazon keeps growing, other states should follow California’s example and mandate that online retailers collect sales taxes, too.

In pushing the referendum, Amazon has been arguing that California needs to do more to attract business, not drive it away. That’s doubtlessly true, but it’s hard to see how lenient tax treatment for online retailers furthers that goal. As the sponsor of California’s new law rightly put it in May, “If you oppose this bill, you support tax evasion.”

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