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Amazon CEO Jeff Bezos addresses a press conference. The online mega-retailer will start charging California customers sales tax.
In just a few days — September 15, to be exact — Amazon will have to start collecting sales tax from Californians who buy stuff (and boy, does Amazon sell a lot of stuff these days) from the online mega-retailer. Last year, Amazon struck a deal with the state. In exchange for getting the statutory sales-tax deadline extended by a year, the company agreed to drop a ballot-measure battle it was gearing up for; and to create a total of about 35,000 full- and part-time jobs in the state by 2015.
So what does this all ultimately mean? Let's break it down.
Q: I'm buying stuff like crazy from Amazon ahead of the deadline. Am I really getting out of paying sales tax?
A: Legally, no. While the sales-tax deadline was extended, the "use tax" provision of state law wasn't waived. As the L.A. Times points out, taking a very hardline position, you were never technically getting away with skipping the sales tax before this whole thing came to a head last year. If you made purchases through Amazon, you were supposed to calculate the sales tax yourself and send it in. Amazon will now start doing that for you, but you're officially liable for the tax that you should have paid as sales tax on all those flatscreen TVs, tennis rackets, and Kindle Fires you picked up over the course of the past 12 months.
Q: Wasn't federal legislation supposed to fix this?
A: Yes... Maybe... Possibly. Actually, Amazon would have preferred a national resolution, with Congress telling the states what to do about online sales tax. For the retailer, that would have been better than a piecemeal approach. However, in an election year, Congress decided not to move on this. So in the end, Amazon simply managed to buy its customers some time. And it's entirely possible that the next Congress may take this up. At which point Amazon can fire up its lobbying machine.
Q: But wait! Don't customers have to pay up anyway?
A: Yes! But that will of course come down to a question of enforcement. Will California go to the trouble of making everyone who didn't pay online sales tax between this week and last September pony up? Maybe. But then again, the state may be satisfied that it brokered a favorable deal with Amazon and is now in a position to begin collecting that formerly lost revenue automatically, without having to force consumers in the state to send in delinquent use tax.
Q: Is this going to fix California's budget problems?
A: Well, no. According to the L.A. Times, the total take for the state from having online retailers collect sales tax at the moment of purchase will be $317 million, and Amazon's contribution will the less than $90 million. That's not nothing, but in the context of the state's $16-billion deficit, it's sort of like ridding a very large, sick elephant of an ailing fly. The beast will feel very marginally better and get rid of one pesky point of suffering. Long-term, if Amazon follows through on its job promises, there may be a larger economic impact.
Q: What does this mean for Amazon?
A: That's the multi-million-dollar question. Being able to sell stuff without exposing customers to sales tax means that Amazon can take California's sale-tax rate and turn it into a discount over brick-and-mortar operations. Remove that away and Amazon really has only one choice, because raising prices isn't much of an option: cut prices. Can Amazon do this? It can, as it has shown with its tablet business, undercutting the market in order to gain share. But that's with tablets, which can in Amazon's case be seen as an access point to the company's vast repository of content — content that customers pay for. Physical merchandise may be a different story.