Amazon's next move unclear as California requires online sales tax

SACRAMENTO — California shoppers are about to lose a big tax break.

Beginning Friday, Amazon.com and other large, out-of-state retailers will be required to collect sales taxes on purchases their California customers make on the Internet.

But whether Seattle-based Amazon begins charging California customers sales tax as soon as Friday remains to be seen.

"This will not cause our retail business to collect sales tax for the state," Amazon spokeswoman Mary Osako said in an email Wednesday.

Osako did not say what actions Amazon might take to challenge the California law, beyond making good on an earlier threat to sever ties with thousands of online affiliates in the state.

The new tax-collection requirement — part of budget-related legislation that was signed into law Wednesday by California Gov. Jerry Brown — is expected to raise an estimated $317 million a year in new state and local government revenue.

Brown's signature on the budget bills is aimed at closing a loophole that freed online retailers from collecting sales taxes and sending them to the state when they had no brick-and-mortar stores, warehouses or offices in California.

Not collecting sales taxes gave Internet retailers a competitive price advantage over California's small businesses such as independent booksellers and big-box retailers with a presence in the state.

"You can't give one segment of retail a 10 percent discount every day. It's just not fair," said Bill Dombrowski, president of the California Retailers Association, a major player in a coalition of stores supporting the legislation.

California's new requirement will generate much needed state revenue and send a signal to Congress that "we want to see a national solution" to the issue of taxing Internet sales, Dombrowski said.

California is the seventh and largest state in the country to pass a law to collect taxes on out-of-state Internet sales. Illinois, Arkansas and Connecticut acted earlier this year, North Carolina and Rhode Island in 2009 and New York in 2008.

Amazon sued to overturn the New York law and lost in the lower courts. The company is paying sales taxes into an escrow account pending an appeal.

Other states are considering similar sales-tax-collection bills.

California's new law was drafted to circumvent a 1992 U.S. Supreme Court ruling that sellers can't be forced to collect sales taxes if they have no physical presence in the state where buyers live.

The new statute would establish that presence in two ways: when sellers pay commissions to other Internet sites in California, known as affiliates, that refer buyers; and when sellers have a related company operating in the state.

Amazon has thousands of such affiliates in California. It also has related business operations that include Lab126 in Cupertino, Calif., which develops Kindle electronic book readers, and a Los Angeles office for its Internet Movie Database unit.

Amazon and Overstock.com in Salt Lake City, another major online retailer, have notified their affiliates in California that California's law is forcing them to terminate contracts. The two companies have said affiliates would have to move to another state if they wanted to continue earning commissions for referring customers.

Seattle Times business reporter Amy Martinez contributed

to this story.