California Governor Imposes Controversial Internet Tax

On Friday, California Governor Jerry Brown signed a bill into law that requires large out-of-state online retailers to collect sales tax on purchases that California customers make on the internet. Although Brown calls this “a common sense measure,” the trend of cash-strapped states' finding new ways to tax simply deflects the problems of spend-happy state governments away from themselves and drives businesses away.

Before this law, consumers did not pay any sales tax to California because internet retailers like Amazon and Overstock.com did not charge them. But Brown — presiding over a government that is billions in debt — claims this tax will raise $317 million in state revenue. However, it does not come without the predictable consequences of imposing new taxes.

Some 25,000 “affiliates” in California, who benefit from companies like Amazon’s horizontal and interdependent business structure, will have to move to another state if they want to continue earning commissions for referring customers. Even though these “affiliates” are mostly small companies, who paid a total of $152 million in state income taxes last year, California wants more. From Lab26 Inc. in Cupertino, which manufactures Kindles, to the owner of a 12-year-old small photography website, it is a question of where (not if) these businesses will move.

Like nearly all coercive government regulations and taxes, this new tax was lobbied for and heavily supported by large non-internet based companies, like Walmart, Target, and Best Buy; they are upset about the supposed unfair advantage. Instead of finding new ways to compete in the marketplace, they would rather stifle competition.

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

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