Time for California to Tax Internet Purchases?

Most people now believe that California's budget crisis is revenue-based rather than spending-based. Even outgoing Governor Arnold Schwarzenegger belatedly has adopted that position.
The biggest problem with California's revenue-collecting is the state's reliance upon relatively few revenue streams.

Because the state collects too much money from too few sources, just about everyone feels that they are overtaxed.

As it is, personal income taxes account for more than half of the money that goes to the general fund, with sales taxesweighing in with another 25 percent. Bank and corporation taxes make up another 10 percent of the state's take, with fees and other miscellaneous sources accounting for the rest.

So, what new sources might we tap to broaden the tax base? Try the Internet.

Those online tax-free bargains we've been enjoying for so many years are starting to make a big difference in the state's coffers. Everyone knows that companies selling products via the Internet don't collect sales taxes unless they have a physical presence in the state. So, if you buy online from Macy's, you pay sales tax. Otherwise, if you purchase something online from Amazon, Overstock.com or Priceline, you don't pay sales tax because they have no stores or warehouses in California. The good news is that online purchases are tantamount to almost a 10 percent discount for the shopper. The bad news is that in 2010, the state treasury is losing $1.1 billion in taxes because of online shopping. 

Of interest is that people were paying these sales taxes before the growth of online businesses, but technology has allowed those taxes to go away. And along the way, brick and mortar stores--and their employees--have been pushed out of business.

To date, the only action taken by the state legislature is a law requiring tax payers to declare their online purchases, determine their sales taxes, and send the money in with their income tax payments. The law has virtually no enforcement provisions, so how many people do you believe voluntarily comply? Virtually no one. Last year, the new law brought in $2.3 million--a small sliver of what the state was entitled.

So why doesn't the state force online companies to add sales taxes? Until recently, most states thought that federal law prevented them from taxing online purchases without physical presence of the seller. But recently New York became the first state to pass legislation that defines a seller's presence via Internet as an extension of physical presence.

If the New York law holds up in the federal courts, California will have the same opportunity to require online businesses to collect sales taxes on purchases. That may be the easy part. Given the ability of sectors like the oil industry, tobacco, alcohol and other powerful interest groups to thwart significant taxation, it's hard to believe that online businesses won't throw their weight around. After all, more than $1 billion in new revenue is at stake.

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