Bloomberg News

California Deal Would Force Amazon to Collect Sales Tax in 2012

September 09, 2011

Sept. 9 (Bloomberg) -- Amazon.com Inc. would drop a quest to exempt itself from collecting sales taxes in California and the state would forfeit about $200 million under an agreement that lawmakers must act on today if it’s to be adopted.

Seattle-based Amazon, the largest online retailer, agreed to abandon its planned 2012 referendum on Internet-sales taxes in exchange for a one-year break in levying the tax on purchases by California residents, state Senator Loni Hancock said yesterday.

The deal would cost California about $200 million in lost tax revenue over the next year, based on Board of Equalization estimates. It also may slice Amazon’s sales by about 5 percent next year as consumers pare purchases to avoid paying the higher tax, said Kerry Rice, an analyst at Needham & Co.

“It’s a classic compromise,” Hancock said from her office in Sacramento. “Amazon recognizes its obligation to collect and remit sales taxes in California.”

Amazon has fought attempts by New York, Texas, Rhode Island and North Carolina to force it to collect the same sales taxes as brick-and-mortar stores, saying only the federal government can regulate commerce among states. The California Assembly’s budget office estimates the state loses $317 million a year when residents fail to pay sales taxes for online purchases.

Amazon fell $2.64, or 1.2 percent, to $217.26 as of 4 p.m. New York time on the Nasdaq Stock Market. The stock has climbed 21 percent this year.

State Revenue Shortfall

Under the proposed compromise, Amazon and the state would also work together to seek a uniform federal standard to assess taxes on Internet commerce, Hancock said in a phone interview. A federal law would supersede the state law.

Mary Osako, a spokeswoman for Amazon, declined to comment on the possible deal with California leaders, as did Ned Wigglesworth, the spokesman for Amazon’s referendum campaign.

The loss of expected tax revenue from Amazon sales may increase the likelihood of cuts to public education, universities and social programs next year. In August, the state Finance Department said revenue missed the projections in the 2011-12 budget by $541 million.

The estimated tax revenue never was a sure thing, Assemblyman Charles Calderon said yesterday at the Capitol. He noted that Amazon has spent at least $5.25 million to overturn the June law requiring online retailers to collect sales taxes, and also could challenge the law in court.

“The $200 million is an estimate based on a lot of assumptions,” Calderon said.

Amazon Earnings Impact

Besides trimming Amazon’s sales, collecting the taxes may also cut 2012 earnings by almost a third, Rice said. Income may fall to $2.91 a share from his estimated $4.06 a share, he said. That’s less than the average prediction of $3.20 by analysts surveyed by Bloomberg.

Amazon’s share price and results will suffer as more states begin requiring the company to collect the taxes, he said.

“Ultimately they will have to collect sales tax across the board,” Rice said. “The estimates would all have to come down to reflect the potential impact of collecting sales tax.”

The tentative deal was struck Sept. 7 in a meeting with legislative leaders, Amazon representatives and the California Retailers Association, said Bill Dombrowski, president of the association.

“All of us expressed a desire to come to a legislative solution,” Dombrowski said in a telephone interview.

Wal-Mart, Best Buy

He said the bill may come to a vote today, the last day of the legislative session. If approved, the bill would need the signature of Governor Jerry Brown. Brown said yesterday that he wasn’t familiar with the terms of the proposed deal.

Retailers including Wal-Mart Stores Inc., the world’s largest retailer, have opposed the Amazon-led repeal effort, calling it a campaign to preserve a tax “loophole.” Other retailers, including Richfield, Minnesota-based Best Buy Co. and New York-based Barnes & Noble Inc., also support the state’s effort to collect sales taxes from Amazon.

“They are losing on this issue,” Colin Gillis, an analyst at BGC Partners LP in New York, said of Amazon. “States need revenue.”

--Editors: Tom Giles, Pete Young

To contact the reporter on this story: James Nash in Sacramento at jnash24@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Mark Tannenbaum at mtannen@bloomberg.net


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