Amazon Takes On California At The Ballot Box—And It Thought E-Commerce Was Rough

In a political gamble, Amazon is taking its fight against E-Commerce sales taxes directly to California voters. On July 8, the E-tail giant filed paperwork to challenge the "Amazon tax" law that took effect in California this month. Amazon now has until late September to collect 500,000 or more signatures to qualify for a vote on the November 2012 ballot—and if it crosses that hurdle, the company will find out just how much consumers mind paying online sales tax.

The risk for Amazon isn't just that its referendum effort might fail. Long before the 2012 election, Amazon and California tax officials will be in court, and that could rule the law valid or not. But going after the tax through such a highly public political process is likely to put every brick-and-mortar competitor and disgruntled customer on the other side of the campaign—and to make this a referendum not just on the Amazon tax, but on Amazon itself.

Amazon filed the referendum paperwork a week after the effective date of California's expanded sales-tax law, which expands the definition of who must collect sales or use tax to any retailer with affiliates or sister companies in the state. Without connections like those—"nexus" in tax-collecting jargon—a state can't collect taxes from an out-of-state retailer, according to a series of U.S. Supreme Court decisions.

As with previous states, Amazon ended its California affiliate program just before the law took effect. But California is also where the Kindle is designed—by a subsidiary that falls under the new California law. That means, even without affiliates, Amazon has a connection in California, and that makes it less certain that Amazon will be able to beat the law in court, as it's attempting to do in New York.

That explains why Amazon is going the referendum route, which in California allows voters to approve or reject laws that the legislature has passed. The referendum is binding, not advisory—if 51 percent of the voters vote no, the law is rejected. In that case, in less than two years Amazon could be out from under California sales taxes (at least until a federal law clears the way for Internet sales taxes nationwide).

Such a result would come far faster than any court case is likely to run. In New York, for example, Amazon has been in court fighting a sales-tax law since 2008. After three years and a round of appeals, it's still in the trial-court stage.

On the other hand, if more than half the voters vote yes in 2012, thereby keeping the tax alive, Amazon still has its shot at getting a court ruling that the law doesn't apply to it.

But that would mean a very large state that's notoriously averse to passing tax measures had OKed the Amazon tax.But that would mean a very large state that's notoriously averse to passing tax measures had OKed the Amazon tax. That, in turn, would likely encourage other states to pass such laws (currently only seven states have them on the books: Arkansas, Connecticut, Illinois, North Carolina and Rhode Island, along with California and New York).

It would also light a fire under Congress, which has been procrastinating for years on legislation to clear the way for Internet sales taxes. When the U.S. Supreme Court last ruled on state laws pushing sales tax on out-of-state retailers, the Court made clear that it expected Congress to straighten things out. That was in 1992. But a California popular vote in favor of such a tax could turn that tide.

There's yet another level of stakes in Amazon's gamble, though. When Amazon goes to court to fight sales taxes, consumers don't notice—it's a low-profile, long-term process. But when Amazon hires hundreds of people to collect as many signatures as it can from California voters, it becomes a high-profile political move. Even if Amazon doesn't actively advertise that it's behind the referendum to spike the law, its brick-and-mortar opponents will make sure potential petition signers know who's pushing it.

And Amazon will need lots of petition collectors. Over a period of about 10 weeks it will have to collect roughly 500,000 valid signatures to get on the ballot. To get bragging rights and a good start to its campaign, shooting for a million or more signatures would be a better idea.

That's a lot of politicking for a retailer—probably more than any retailer has every publicly engaged in before.

But politics—especially California ballot-measure politics—quickly turns personal, bruising and frequently brutal. Californians can expect to hear that retailers shouldn't be playing politics (that will come from brick-and-mortar retailers who are, of course, also playing politics). And that Amazon has higher prices than it otherwise might due to its electioneering. And that out-of-state troublemaker Amazon is willing to destroy California's schools and roads, not to mention mom and apple pie, all for a few cents from each sale to line Jeff Bezos's pocket. And that's all before anyone even mentions WikiLeaks, Kindle censorship or books for pedophiles.

Will all that hurt Amazon's sales in California or anywhere else? That's unknown. But over the next year and a half, Amazon is likely to find out.