The tax war between California and Amazon.com has been brewing for 16 years, since the day the retailer with the sly-grin logo opened for business.

Amazon has fought against collecting sales tax from customers wherever possible, as a way of underpricing brick-and-mortar competitors such as Barnes & Noble. It was a big reason why the Internet pioneer, exploiting a wrinkle in the tax laws, put its headquarters in Seattle instead of the Bay Area. The choice meant it would have to collect sales tax from Washington state customers, but not in California, the biggest market of all.

But now California believes it has caught up with Amazon. Gov. Jerry Brown signed a law last month saying online retailers with a physical presence in California must collect sales tax.

With that, a cold war turned hot. Amazon has refused to collect the tax and fired its 10,000 California affiliates – businesses that earned commissions by allowing customers to click through their websites to Amazon.

Escalating hostilities, Amazon last week unveiled a ballot referendum to overturn the law.

A ballot fight would pit a $34 billion-a-year Internet titan against the largest state in the union. California's allies include traditional retail powerhouses such as Wal-Mart and Barnes & Noble.

"You've got yourself an epic battle," said Jack Pitney, a political analyst at Claremont McKenna College.

Amazon isn't just the No. 1 Internet retailer. It's the lead dog when it comes to fighting the online tax issue. It is suing New York over a law similar to California's and dangling jobs for local communities to get lawmakers in other states to ease off.

But lawmakers are pushing back. Nine states have passed some kind of Internet sales tax law, none more influential than California. So far Amazon has managed to sidestep those laws, but momentum is building.

"I think there is a bandwagon forming," said former Democratic Assemblyman Dario Frommer, a Los Angeles lawyer who is advising Amazon adversary Barnes & Noble. "But Amazon is very crafty, very resourceful."

Democratic lawmakers maintain the ballot referendum is unconstitutional. Amazon disputes that, and litigation seems likely. If the referendum does qualify for the ballot, it would go to voters next year.

But a major test of the new California law could come as early as Oct. 31 of this year.

That's when retailers are supposed to make their sales-tax payments for the quarter ending Sept. 30. Jerome Horton, chairman of the Board of Equalization, said last week the agency expects to issue "estimated billings" to those retailers who don't pay up.

Amazon says it isn't opposed to an Internet sales tax. It just doesn't want to deal with the complexity of 7,500 different tax jurisdictions in the United States. Founder and Chief Executive Jeff Bezos has said he supports a unified approach that simplifies tax collection across the country.

But skeptics say Amazon is really trying to put off the tax obligation as long as possible.

The retailer realizes it can't avoid tax collection forever, they say. In some states, it's negotiating deals to merely delay the tax law a few years.

"The folks at Amazon are not dumb; they know that at some point they're going to collect tax," said Joe Huddleston, executive director at a Washington, D.C., alliance called the Multistate Tax Commission. "But right now, (not collecting) gives them a distinct business advantage, and why give away that advantage?"

Price advantage at stake

California lawmakers say the new law will generate $200 million or so in new tax revenue. That's little more than a rounding error in an $85.9 billion state budget.

But there's considerably more at stake. A study by professor Richard Parker at San Diego State University says California brick-and-mortar merchants lose $4 billion a year in sales to the Web.

"The idea that they shouldn't have to collect sales tax has created an uneven playing field … a 10 percent advantage off the top," said Alzada Knickerbocker, owner of the Avid Reader bookstores in Davis and Sacramento.

Experts say Amazon would lose a good chunk of its low-price edge if it had to collect sales tax.

"All of a sudden, you're finding it's very difficult to compete against the big electronic retailers like Fry's and Best Buy," said Suresh Kotha, a University of Washington management professor who has studied Amazon.

An edge on price was exactly what Bezos contemplated when, at age 30, he left his career as a Wall Street trader, moved to Seattle and founded Amazon. It was July 1995.

The Web gave Bezos the opportunity to create the world's largest store, with a selection no physical merchant could rival. It was also a cheaper place to do business, and part of the advantage was the lack of sales tax.

That advantage was rooted in a 1992 U.S. Supreme Court decision. It said an out-of-state retailer couldn't be forced to collect sales tax unless it had a physical presence in the state.

Bezos realized Amazon's headquarters would be an obvious physical presence. Amazon would have to collect sales tax in its home state.

So he sidestepped California and moved instead to Washington state – a good location for a tech firm, and a much smaller customer base.

"We thought about the Bay Area, which is the single best source for technical talent," he told Fast Company magazine in 1996. "But it didn't pass the small-state test."

Dangling jobs as leverage

States have been trying to work around that Supreme Court case for years. The California Legislature voted to tax the Internet in 2000, but then-Gov. Gray Davis vetoed the bill. He said the e-commerce industry was too young and fragile to be taxed.

His successor, Arnold Schwarzenegger, vetoed a similar bill two years ago.

But the climate is changing. With Brown's signature, California became the ninth state to pass a law taxing Internet sales.

Most of those states, including California, got around the Supreme Court case. They did it by declaring that retailers' in-state affiliates – businesses that earn commissions by referring customers through their websites to the Amazons of the world – constitute a physical presence.

Amazon and other online retailers have responded in most cases by firing their affiliates and eliminating the physical connection.

But in California, Amazon has other physical ties – a handful of subsidiaries, including a Silicon Valley office that designed the Kindle e-reader. State officials say that means Amazon is subject to the new law.

Many experts believe California's law will go to court. Amazon and Overstock.com, another big Web retailer, are already suing to overturn New York's law. Amazon is collecting sales tax from New Yorkers while the litigation is pending, but is holding the money in an escrow account.

Elsewhere, Amazon is using jobs and economic development to try to make legislators back off.

In South Carolina, Amazon threatened to cancel construction of a major distribution center unless the state gave the retailer a sales-tax exemption for four years. Lawmakers relented.

It's not clear if the same strategy will work in Texas. Gov. Rick Perry agreed to give Amazon a five-year exemption if Amazon brings 5,000 warehouse jobs to the state. The Legislature passed a bill anyway – still pending on Perry's desk – that says Amazon must collect sales tax no matter what.

"You're starting to see states just fed up with the tactics," Frommer said.

© Copyright The Sacramento Bee. All rights reserved.

---

Call The Bee's Dale Kasler, (916) 321-1066.

• Read more articles by Dale Kasler