Sales taxes, once the primary source of revenue for the state budget, now play second fiddle to income taxes.

That said, sales taxes are still very important to local governments, particularly cities, and often affect local land use decisions – favoring tax-generating retail business over housing, for instance.

However, consumer trends are changing, radically affecting how many billions of sales tax dollars are allocated, and the Legislature is just beginning to deal with it.

Brick-and-mortar stores are losing consumers to online marketplaces such as eBay and Amazon, forcing some retailers, such as Walmart, to embrace digital commerce themselves.

Currently, local sales taxes accrue to the jurisdictions in which the underlying transactions occur. If you buy a living room chair from a store in Sacramento, for instance, the city claims a few dollars of sales tax. But what happens if you order that chair via the internet from Amazon and it’s delivered a few days – or maybe even a few hours – later?

Amazon does collect sales tax, thanks to a landmark deal with the state a few years ago that paved the way for the giant company to establish a string of “distribution centers” to service such orders, and the state gets most of those revenues.

However, online sellers typically have tax-sharing agreements with the communities where their immense warehouses are located. Those communities get the local share of taxes from shipments on the theory that they are the transaction sites, then kick back some of the revenue to the companies as a subsidy.

It’s a double benefit for those communities, which are often in semi-rural, economically depressed regions, generating both warehouse jobs and some sales tax revenue.

Predictably, however, local governments (and local transportation agencies) that are frozen out by those deals and suffer sales tax losses are unhappy.

Enter Senate Constitutional Amendment 20, carried by Sen. Steve Glazer, an Orinda Democrat, which won unanimous approval of the Senate Governance and Finance Committee last month.

If approved by the Legislature and the state’s voters, it would allocate taxes from online sales to the cities or counties in which the buyers live, taking them away from the warehouse communities.

It would implement a recommendation of the state auditor’s office, which studied sales tax allocation last year, and although the committee hearing was brief and polite, the conflict, pitting city against city, is real.

Officials of cities with online warehouses see it as a money grab by warehouse-bereft cities. And since the former tend to be low-income communities and the latter are more affluent, with high-spending residents – such as Glazer’s Orinda – there’s an element of class friction.

Without resolution, the conflict can only grow more intense, since online sales are growing rapidly and those in physical stores are, at best, stagnant, as shown by the declining fortunes of even such venerable retailers as Sears.

The League of California Cities, which has members on both side of the issue, is trying to hammer out a compromise. Before voting for Glazer’s measure, Sen. Robert Hertzberg, a Van Nuys Democrat who’s been working on a comprehensive state taxation overhaul, said, “We need to fix the whole thing.”

Yes we do, but any change of tax policy creates winners and losers and SCA 20’s conflict underscores the heavy political lifting that comprehensive tax reform would require.

That’s why Gov. Jerry Brown has refused to take it on, even while saying it needs to be done, and is leaving it to his successor.

CALmatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.




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