The debate over whether or not online retailers should be made to pay sales tax on products sold in states where they do not have a considerable physical presence is at full boil now that the issue is affecting America’s most populous state of California.  The state’s attorney general ruled last week that Amazon.com Inc., the world’s largest internet retailer, can begin amassing signatures to get on the ballot and possibly repeal the new California law on this issue.

Oftentimes referred to on the whole as the “Amazon Tax,” a number of statewide initiatives have been proposed in the past year to close what many believe to be a “loophole” in the current tax code―a loophole that has allowed internet retailers to sell to customers across state lines while avoiding paying sales taxes in those states.  As the largest retailer of its kind to be affected, Amazon.com has been at the forefront in fighting attempts to alter the tax rules in a number of key states, including New York, Texas, Rhode Island and North Carolina.  Now that the issue has hit with full force in California, everyone with even a passing interest in this issue is watching closely to see what the outcome will be.

California’s state budget office estimates the state is losing $300 million-plus when its residents do not pay taxes on their internet purchases.  And while not having to pay sales tax constitutes a huge windfall for consumers as well as the online retailers doing the selling, the opposing claim is that it’s not only the state’s bottom line that suffers.  Organizations such as the Alliance for Main Street Fairness, a coalition of large and small “brick and mortar” retailers, also are weighing in and demanding that online retailers pay up.  Why?  It’s because they feel internet sellers have enjoyed an unfair tax advantage long enough and that many of them are being put out of business as a result.

Furthermore, larger retailers such as Sears/Kmart are also having their say in the matter.  William R. Harker, senior vice president of Sears Holdings, was recently quoted in a New York Times article asserting the following:  “At a time where our state and municipal governments are going through really a fiscal crisis, taking steps to collect taxes that are already on the books is to me the fiscally responsible thing to do.”

The new California law that was passed just last month and that is stirring up so much controversy requires that online retailers pay sales tax if they have affiliates or subsidiaries in the state.  Shortly after the law passed, Amazon severed its relationships with approximately 10,000 online partners that sell their products through Amazon.com, many of which are small business owners who may not be able to survive such a blow. 

Amazon alone is estimated to owe as much as $83 million this year in taxes under the new law, which is almost half of what the state anticipates all of its internet sellers will owe this year combined.