It’s Time to Level the Playing Field and Adopt E-Fairness in California

Bill Dombrowski
President and CEO, California Retailers Association

The holiday season has just ended and it has been reported that retailers overall experienced an uptick in sales from the previous year. This would be good news for California’s small businesses.

Unfortunately, California’s outdated e-commerce laws allow for out-of-state, online-only retailers to thwart the law and deliberately refuse to collect the sales tax so that they can gain an unfair advantage over California small businesses. This has resulted in a less than sweet holiday season for the small businesses in our state.

The practical impact of this loophole is vast. Job creators are harmed as they are treated more and more like showrooms where customers determine what they want to buy and then purchase it online to avoid the sales tax. This translates to approximately a 10 percent advantage over small businesses located in our state.

Without updating the state’s law, California employers will continue to be at a disadvantage, which will result in costing more and more significant losses in economic activity, jobs and revenue. According to a 2010 white paper by Richard Parker, he found that almost everyone in California pays the price as a result of these out-of-state, online-only retailers exploiting this loophole.

Small businesses suffer. It is estimated that there will be indirect and induced impacts brought by sales losses which will cause billions in lost economic activity as well as huge losses in sales tax revenues this past year due to this outdated law. This continues to add pressure on small businesses where many may end up having to reduce their employees or close all together.

The economy suffers. As a result of these sales going to out-of-state stores, there is an estimated $7.2 billion in lost economic activity. These billions of dollars of economic activity are essentially leaving our state with a click of a button – all because of the state’s e-commerce laws.

And finally, services suffer. The Board of Equalization recently estimated that every year more than $1.1 billion in sales tax revenue is lost from online sales. While our state does require consumers to report and pay the sales tax on their income tax returns, very few are aware of it, much less comply.

This means we are losing out on revenues that could help reduce the state’s deficit, help schools, repair potholes, and fund financially-strapped police and fire departments.

This year is the time to level the playing field.

The solution is simple: We need to require out-of-state, online-only retailer with a presences in the state to do what is required of California small businesses and collect the sales tax that comes with each transaction at the point of purchase.

Just this holiday season alone, a larger percentage of consumers purchased their gifts online than ever before. Additionally, since 2000, Web sales have more than tripled to achieve a 19 percent compound annual growth rate. Over the next 10 years, Goldman Sachs projects online growth to be five times the rate of growth for traditional retailing. With e-commerce’s rapid acceleration, it is critical that California correct its outdated laws to reflect the realities of 21st Century commerce.

This is why we are supporting Assemblymember Nancy Skinner’s legislation (AB 153) to update the laws and level the playing field. Every year, the state fails to act, more and more we will see our favorite small businesses close their doors as they cannot compete on a playing field that is so stacked against them and we will watch revenues that fund our most important services diminish.

Maintaining the status quo is unfair and punitive to small businesses – the engine of our economy. It is time California ensures that out-of-state, online-only retailers with presence in California have the same requirements for collecting sales taxes as its small businesses.

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