California's Newest Job-Killer. Internet Sales Tax Law Will Only Accelerate State's Decline

The job-killing internet sales tax law just signed by Governor Jerry Brown will only accelerate the decline of our most populous state.

Consider the facts. Already, on the recent ranking of states on the basis of their tax climates done by the Tax Foundation, California is almost at the bottom at #49. On the ranking of states for economic freedom done by the Mercatus Center, it stands at a risible #48.

Moreover, as business relocation consultant Joe Vranich reports, California has seen a rapidly increasing business flight. California was averaging one "disinvestment event" (read: a business either relocating an existing facility to or deciding to open a new facility in another state) per week in 2009. Last year it jumped to an average of 3.9 disinvestment events a week. So far this year, this benighted state has seen that average soar to 5.4 a week.

The business exodus is so pronounced that some California state legislators -- accompanied, ironically enough, by the state's Lieutenant Governor Gavin Newsom, the ex-mayor of San Francisco -- recently visited Texas to get some clue as to why so many of California's businesses are fleeing there, as if they didn't know already.

And California's unemployment rate still hovers around 12%, one of the highest in the nation.

In the face of all this, Democrat Governor Jerry Brown and the Democrat-controlled legislature decided to enact a law that would require internet retailers such as Amazon to start collecting and forking over state sales taxes on all internet purchases by Californians.

Now, in 1992, the U.S. Supreme Court ruled (in Quill Corp v. North Dakota) that while states could compel mail-order companies (and, by probable inference, internet companies) to collect sales taxes for a state if, but only if, those companies had a physical presence -- bricks-and-mortar facilities -- within that state.

This ruling, parenthetically, makes fairly good sense. If we view the legitimate purpose of sales taxes on businesses as being to help pay for the police and fire protection those businesses receive for their facilities, then it seems unconscionable to collect taxes from any business that has no facilities in that state.

But the unintended negative consequence then becomes obvious. When a national internet company like Amazon has affiliates in a state, and that state imposes an internet sales tax, the logical thing for the big internet company to do is just to cease doing business with its small affiliates in that state. The small affiliates then either have to move to another state or cut back their operations. Either response costs jobs in the state imposing the internet sales tax.

That is precisely what Amazon did when Illinois passed such a law recently: Amazon ceased doing business with its Illinois affiliates. And before California passed its similar law, Amazon warned it that it would do the same in the Golden State.

Even knowing all this, the wise solons in Sacramento passed the law anyway, and Governor Brown signed it. The promise is that it will raise $317 million a year in sales tax revenue. But does anyone believe that? When Rhode Island passed such a law, it collected only negligible receipts.

In any case, sure enough, the day after Brown signed the law into effect, Amazon notified its 25,000 affiliates in California -- small businesses, typically sole proprietorships that sell specialty items in part through Amazon -- that it is ceasing all business with them.

Many people stand to lose jobs because of this idiotic move, but (to use Bastiat's phrase) they will be unseen. The guy who has been selling, say, obscure DVDs for a few extra grand a year will either have to move or cut back his own purchases from local retailers. Either way, the state loses jobs. Oh, and that guy will now no longer be paying as much income tax to the state. If he moves, he'll be paying none at all.

Some internet commentators have suggested that the reason why the dumb Dems passed this screwy law was to reward big donors such as Walmart and other big-box retailers. And in truth, there is no doubt that such big-box retailers have supported internet sales taxes as a way to eliminate a perceived competitive advantage the internet companies have. But this raises two further thoughts.

First, it is nothing short of hilariously hypocritical to hear a huge company like Walmart complain about facing unfair competition from the vastly smaller internet companies. After all, that is precisely the complaint competitors of Walmart have made against Walmart for decades. Looks like turnabout isn't fair play after all! In fact, it is positively grotesque to see the mega-billionaire Walton family trying to destroy the meager incomes of some hapless sole proprietors who are only trying to sell a few items via the web.

Second, if it is Walmart's plan to "equalize the playing field" by pushing state after state to force the internet companies to collect sales taxes, then Walmart is doomed to failure. Trying to force internet retailers to collect sales taxes will only drive them offshore, maybe to Mexico, resulting in lost jobs nationwide, and presumably lower sales in the very big-box stores that pushed for those internet sales taxes.

So whether they stand in the governor's office or the boardrooms of the big retailers, the supporters of the internet sales tax can't be anything but deeply demented.

Gary Jason is a contributing editor to LibertyUnbound.

Your scenario is not what the internet tax law is all about. I sell to businesses and if the goods are sent out of state, there is no sales tax. The taxes they want collected are those that are purchased by someone in California, but shipped in from out of state, or bought from companies that are actually located within California, as our intrepid legislature is saying that Amazon is by having local affiliates. However, the law is still government shooting itself in the foot.

Sales tax is not even the driving factor in the success of internet stores over “brick and mortar.” If prices were the same, ordering off the internet would not be as attractive, since you have to add in shipping to the cost in most cases. The real advantage is the internet retailer not having to pay the same costs as the guy with a "real" store. Distribution costs are less when the inventory is centralized. Rent, electricity, etc. cost much less per item and there's lower cost of labor and regulation out of state. Add in volume discounts that huge buyers like Amazon have over smaller stores and the bottom line is that a $40 item purchased down the street may only cost $25 or so online. The tax versus shipping costs are a wash, but you still save $15 bucks either way.

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