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Los Angeles
Times
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June 7, 2000, Wednesday, Home Edition
SECTION: Part A; Part 1; Page 3; Metro Desk
LENGTH: 1184 words
HEADLINE:
CALIFORNIA AND THE WEST;
INTERNET TAXES A TOUCHY ISSUE IN LEGISLATURE;
ECONOMY: LAWMAKERS STRUGGLE TO BALANCE THE INTERESTS OF THE COMPUTER
INDUSTRY WITH THOSE OF SMALL RETAILERS, WHO SAY IT'S UNFAIR NOT TO TAX ONLINE
SALES.
BYLINE: MIGUEL BUSTILLO, TIMES STAFF
WRITER
DATELINE: SACRAMENTO
BODY:
Tom Ahern is no anti-technology Luddite.
To stock the shelves at his Latitude 33 Bookshop in Laguna Beach, where
Sophocles outsells Danielle Steel, the former computer programmer engages in
e-commerce with New York's biggest publishing houses, ordering books with the
click of a mouse.
He believes--strongly--in the power of technology to
improve the lives of ordinary Americans and revolutionize the way we shop.
He also believes in taxes--Internet sales taxes to be
exact. And when he sees the big boys at Borders and Barnes & Noble setting
up Web sites to siphon away more of his business--Web sites that are immune to
the California sales taxes that his customers must pay--it makes him rant.
"If they were regular competitors, OK, there is a big pie out there. But
these guys are fairly predatory," Ahern said. "Why should they be getting a tax
advantage on me when they have stores a few blocks away?"
That is a
question under fierce debate these days in the California Legislature, where
lawmakers are struggling to balance the interests of their golden goose of the
moment, Silicon Valley, with the economic well-being of small businesses and the
local communities they represent.
Because of the property tax ceiling
imposed by Proposition 13, California government is highly dependent on a
sales tax base that could be significantly eroded by
Internet commerce in coming years.
Though such business
accounts for just 1% to 2% of total retail sales worldwide, that number is
expected to rise to 15% by 2003. One-third of California's budget coffers and of
overall city revenues in the state, come from sales and user taxes.
But
as with many issues relating to the so-called new economy, tax-free Internet
shopping has become sacrosanct in Sacramento. Efforts to tackle the tax
inequities it has exposed are considered political dynamite. Democrats and
Republicans are jostling to appear friendlier than their enemies to the new
economic gods. And Republicans in particular are warning that any efforts to
"tax the Internet" will force business to flee the state.
Most loudly of
all, moderate Democratic Gov. Gray Davis has declared the
Internet off limits to California sales taxes
for the near future. After a meeting with President Clinton and the nation's
governors in February, Davis said technology-driven growth was already
generating record revenues for government.
In a large sense, the nation
already has a hands-off policy on the issue. The Internet Tax Freedom Act passed
by lawmakers in Washington imposed a temporary ban on new Internet sales
taxes, and Congress is considering whether to extend the moratorium to
2006.
Nevertheless, the protests of small-business owners such as Ahern,
the president of the Laguna Beach Chamber of Commerce, are spurring
consideration of several Internet tax-related bills in Sacramento this year,
including one by Assemblywoman Carole Migden (D-San Francisco) written
specifically to reap tax dollars from the Barnesandnoble.coms of the world.
Legislation by state Sen. Jim Costa (D-Fresno) attempts to push
California to work with other states on a unified system of collecting
sales taxes, one of the main challenges to
Internet taxation. A bill by state Sen. John Vasconcellos
(D-Santa Clara) seeks to reexamine the state's entire tax structure in light of
the changing 21st century economy.
Across the ideological divide,
Assemblyman Steve Baldwin (R-El Cajon) and state Sen. Ray Haynes (R-Riverside)
were working to permanently ban Internet sales taxes, but met
with resistance in the Democrat-controlled Legislature. And some Republican
lawmakers are arguing that California will eventually have to examine killing
sales taxes altogether if it hopes to truly level the playing field and sort out
the tax mess.
Migden and Assemblywoman Dion Aroner (D-Berkeley) insist
that their bill, AB 2412, is not an attempt to impose a new levy on e-tailers.
Rather, they say, it is an effort to make clear that some of them should already
be paying.
"It is not an expansion," Migden said during a debate last
week. "It is simply a clarification of who should and who should not be paying
taxes."
Republicans beg to differ. They contend that the bill is clearly
a tax increase and should have required a two-thirds vote of the Legislature.
After it barely cleared the Assembly, 41 to 30, GOP lawmakers immediately signed
a petition protesting the vote.
"Her solution goes the wrong way," said
Assemblyman Bill Leonard (R-San Bernardino). It is "a massive tax increase on
the people of California," said Assemblyman Keith Olberg (R-Victorville).
The dispute goes to the heart of California's arcane and antiquated
sales tax law, shaped in part by a series of high court decisions.
Retailers are now required to collect sales taxes here only if they have
physical, brick-and-mortar presences in the state, such as a store or sales
office. If they exist in California only through mail order catalogs or
cyberspace, they generally do not have to pay the taxes.
To exploit that
distinction and avoid the tax hook, Barnes & Noble and Borders have
established Web sites that they deem to be independent from the traditional
stores they operate. Numerous retailers, from music stores to clothing
manufacturers, have done the same.
But amid their spacious aisles and
cappuccino counters, the parent bookstores prominently promote the Web sites as
an alternative way of shopping for the latest New York Times bestsellers. And if
a customer seeks to return a book from Borders.com, critics contend, he is told
to visit the nearest Borders outlet. The Migden-Aroner bill would essentially
declare such arrangements hollow here, forcing the retailers to collect sales
taxes from California customers.
"We have a physical store, we have a
Web site, and when it went up, there was no question in our mind that we should
pay sales taxes," said Karen Pennington, a manager of Kepler's bookstore in
Menlo Park and president of the Northern California Independent Booksellers
Assn. "We find it unconscionable that Barnes & Noble and Borders are not."
Rich Fahle, manager of site content for Borders.com, said the company is
secure after consultations with lawyers that it is a separate entity that should
remain exempt from having to collect taxes from California customers.
Nevertheless, he finds the Migden-Aroner bill troubling because he said
it shows that California lawmakers are looking at simplistic solutions to the
Internet's tax problem--solutions that could further handicap competition.
That is because Amazon.com, the massive e-tailer that led all the
mega-bookstores into cyberspace in the first place, has no stores or warehouses
in California, and thus would remain immune from taxation if the legislation
became law.
"The Barnesandnoble.com customer is not going to respond to
this bill by getting into his car and going to the local bookstore," said
Assemblyman Tom McClintock (R-Northridge), one of the most tax-unfriendly
members of the Legislature. "He is more likely to go to Amazon.com."
GRAPHIC: PHOTO: Tom Ahern, owner of Latitude 33
Bookshop in Laguna Beach, believes online sales should be taxed. PHOTOGRAPHER:
MARK BOSTER / Los Angeles Times
LOAD-DATE: June 7, 2000