Governments often take a long time to adapt their laws to societal change, and sometimes it takes even longer to get it right.
Take, for example, the taxation of online retail in California. Sales there began to rise around the turn of the century, shortly after Amazon expanded its distribution from just selling books to selling just about everything.
For more than a decade, the state’s sales tax laws remained frozen, allowing these sales to take place in a tax-free universe, accelerating the decline of brick-and-mortar retail.
It wasn’t until 2012 that Amazon was required by law to collect sales taxes, and it would take another six years before a U.S. Supreme Court ruling allowed the state to collect sales taxes on all online sales.
That 2018 decision largely settled the issue. From that point on, every Californian who bought something online or in a local store paid the same 7.25% state sales tax. What remains unresolved, however, is the fairest way to distribute the portion of that—1 cent of every dollar of retail sales—that goes to local governments.
The process of allocating this local share of the sales tax has long led to a certain amount of tactics. One notable local example was an agreement between the city of Fillmore and a major medical device manufacturer. As part of the deal brokered by a consultant, the company opened a store in Fillmore and declared it the center of all its sales in California. The city then reimbursed 85 percent of the tax revenue to the consultant, who in turn split the money with the company.
Other cities where the company actually had warehouses filed suit, the state Tax Equalization Board froze the distribution of tax revenue, and a judge ultimately awarded the revenue to cities where the company had a significant local presence.
Similar agreements still exist between a handful of cities and major online retailers such as Apple, eBay and Walmart.com. These cities give half or more of their sales tax revenue to the companies and the consultants and lawyers who negotiated the agreements.
A bill to ban such deals failed in the House this year, but a proposal by Rep. Jacqui Irwin (D-Thousand Oaks) that would require public disclosure of the details of such deals is still before the state Senate.
Fortunately, there is no such kickback arrangement between Amazon and Oxnard, the city that is home to the company’s massive, three-county distribution center. Still, the division of the local share of sales tax revenue remains contentious and benefits Oxnard at the expense of other cities in the county. For example, if a consumer in Camarillo purchases $100 worth of goods that are shipped to a Camarillo address, Oxnard receives $1 in sales tax and Camarillo receives zero.
A committee of the League of California Cities has proposed splitting revenue equally between the city from which the goods are shipped and the city to which they are delivered. Oxnard’s city manager says his city could live with a 60-40 split. No one expects the problem to be solved before 2026.
Online sales now account for 16 percent of all retail sales in the U.S., and that share is growing every year. It’s time for California to finally face reality and find a way to fairly distribute the local share of sales tax and remove incentives for manipulation.
The power to raise taxes is a tremendous power, and it is given to the government with the expectation that the revenue will be spent in a way that benefits those who pay the taxes. When it comes to sales tax on online purchases, that is not currently happening.
