How Sales Tax Is Falling Through a Loophole

SACRAMENTO —  Dot-coms are in distress and laying off. Silicon Valley is a home buyer’s bazaar. The Nasdaq is nauseous. So is this any time to be siccing the tax collector on Internet retailers?

You bet. Coddling these techie traders with tax favors doesn’t seem to be helping them much anyway. So why not treat e-tailers like everyone else, like brick-and-mortar merchants? Treat everybody evenhandedly.

That’s the view of Assemblywoman Carole Migden (D-San Francisco), assertive chair of the Assembly Appropriations Committee. For the second straight year, Migden is pushing a bill she says will close a loophole that benefits some Internet retailers. She insists it’s about fairly enforcing existing law, not about a new Web tax, as critics claim.

Present law requires Internet e-tailers to collect the sales tax if they have a physical presence in California, such as a traditional brick-and-mortar store. But some big outfits have created separate out-of-state subsidiaries to handle their Internet orders. Same goods, same ads--with a large tax loophole because the subsidiary ostensibly does not have a physical presence in California.

Never mind that an unsatisfied customer of bookseller Barnes & Noble dot-com, for example, can return the Internet purchase to the local Barnes & Noble store.

Many e-tailers with dual “bricks-and-clicks” operations do collect the sales tax from Internet customers. Migden cites Macy’s, Wal-Mart, REI, Hewlett-Packard and Eddie Bauer. Others refuse, she says: Barnes & Noble, Borders Books, KB Toys, Gateway Computers, Radio Shack.

Her bill simply “clarifies” that the sales tax applies when the e-tailer is affiliated with a California business, sells identical products, and they market jointly.

“Right now,” Migden contends, “certain big businesses blatantly violate the tax law and put hard-working, honest small business people at a disadvantage.”

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Gov. Gray Davis is miffed at Migden, she hears. He vetoed her bill last year, declaring “it would send the wrong signal about California’s international role as the incubator of the dot-com community.” Internet marketing “must be given time to mature,” he maintained.

Now Migden’s at it again. “The governor’s exercised. He thinks I’m jamming him,” she says. “But I’m moving the bill. He can veto it if he wants. I’m putting it on his desk.”

It already has cleared the Assembly tax committee and will shoot out of her panel Wednesday, headed for the Assembly floor. Last year, Democrats backed the bill. Republicans opposed it, siding with the Democratic governor.

Davis fears some future opponent will claim he signed a bill to tax the Internet. Migden is frustrated by that Internet tax tag, calling it “a lazy misinterpretation.”

“I’m not picking on e-commerce,” she protests. “I’m picking on the multinationals who are arrogantly evading the law in complicity with the state Board of Equalization.”

That would be, in particular, Republican board member Dean Andal of Stockton. “It’s the usual liberal nut case bill,” Andal says. “Just a bill chasing no problem.”

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The BOE administers the sales tax. And Andal does agree that if an Internet purchase can be returned to a store, the e-tailer legally must collect the tax. “We’ve been looking into that,” he says.

The board shouldn’t have to look far. Barnes & Noble tells e-customers right on its Web site that “you can return purchases to ANY Barnes & Noble store for in-store credit.”

But other than that, Andal contends, a company has a constitutional right to create an out-of-state subsidiary to avoid taxes.

And, he notes, we’re talking about relative pennies: $17 million annually, the BOE estimates, compared to $39 billion in total California sales tax collections. That lost revenue would cover only about seven hours worth of electricity the state now is buying for utilities.

But e-tailing is bound to grow. Tax avoidance could become significant, benefiting dot-coms while discriminating against small retailers and the poor who cannot afford Internet access.

Migden will be in a strong position to change sales tax policy if she wins her race next year for the five-member BOE. She’s the early front-runner.

Her concern--her reverence--is for the local booksellers, the mom-and-pop merchants, the neighbor shopkeepers who can be smothered by the big tax evaders. “The little guy with the books stacked in the back,” she says, “sweeping the sidewalk, putting on extra locks, obeying the law and collecting taxes--trying to make a go.”

Davis wants to be seen as a futuristic, New Age pol, worthy of campaign donations from wealthy Web masters. But he can manage that without tromping on his Democratic roots as protector of the little guy.