States in the US are trying to repair tattered balance sheets.  In addition to laying off workers and trying to reduce compensation to remaining employees, they are also working hard to develop new revenue sources.  Here are two of the most recent developments:

1. California just passed a law taxing sales over the internet.  It applies to purchases made by California residents from online companies that have a presence in the state.  You’d think that “presence” means factories, warehouses, sales offices, or bricks-and-mortar retail outlets–and it does.  But the new law also says that if a shopping comparison or coupon site located in California refers a customer to an online retailer, and the customer buys something, the fact that the comparison site is in California counts as a presence of the online retailer in the state.

According to the Los Angeles Times, Sacramento figured this new wrinkle to the sales tax would raise $317 million a year in new revenue.  What could they have been thinking?

What’s happened instead is that online retailers from Amazon and Blue Nile to Overstock and Zappos (yes, it’s cheating.  Zappos is part of Amazon, but I needed another end-of-the-alphabet site) have severed relations with the 25,000 or so comparison sites (oh, those wildly entrepreneurial Californians!) the Golden Sate has spawned.  Amazon has apparently sent its (former) affiliates a letter advising them to move out of state if they want to reestablish themselves with the online superstore.

According to the Financial Times, some couponing sites have lost up to 30% of their business since the new law went into effect.  More specialized sites appear to have seen the majority of their revenues evaporate.

Let’s assume that the 25,000 referral sites average four employees each (I’m making these number up, just to try to get a sense of the impact of the new tax).  That’s 100,000 jobs.  If half of the industry either relocates to other states or goes out of business, the new tax will have quickly generated a loss of 50,000 positions.  If each worker had been paying $5,000 yearly to California in sales, income property and other taxes, then the legislation would cause an annual loss of $250 million in state and local revenue.  And that’s without calculating unemployment benefits for laid-off workers.

…not exactly what the doctor ordered.

By the way, Amazon is urging a referendum on the tax, according to the FT.

2.  New York is redefining–“clarifying” might be the word the state would use–what it means to be a resident of the state for income tax purposes.  Details of two recent court cases that bear on this issue, the Barkers and John Gaied, can be found at taxdood.com.

Resident vs. non-resident–what’s the tax difference?  Non-residents pay income tax on income earned in New York;  residents pay income tax on all their income, including investment income.

The Barkers live in Connecticut, Mr. Gaied in New Jersey.  That’s where they vote, where they have their driver licenses, where their cars are registered, where they serve on juries, where their mail gets delivered (Mr. Gaied has some delivered to Staten Island, as well), where their kids go to school.

But,

1.  Mr. Barker works in Manhattan as an investment manager ; Mr. Gaied operates a gas station on Staten Island. Because of their work, both spend more than 183 days a year in New York State.

2. The Barkers own a vacation home on Long Island that Mrs. Barker’s parents use and they visit rarely;  Mr. Gaied owns a house on Staten Island that he bought for his parents to live in.

That’s enough to make them both residents of New York for tax purposes.  The facts that neither party spends much time at their New York houses, and that their primary residences are elsewhere, make no difference.  Owning and maintaining a residential property in New York State that looks like it could be lived in year-round is the essential thing.

Of course, the Barkers are also residents of Connecticut for tax purposes–so they’re taxed twice;  Mr. Gaied is similarly a resident of New Jersey.

According to the tax authorities, the Barkers owe an extra $608,000 in taxes to NYS for the years 2002-04.  After penalties and interest, the total bill is $1.055 million (an aside:  the tax bill implies the Barkers had over $6 million in investment income during the three years.  Wow!).

In the Gaied case, taxdood.com says the courts initially ruled in favor of Mr. Gaied, but political armtwisting got the matter reheard.  In round two, Mr. Gaied lost.

I think this effort by New York State bears watching.  My guess is that NYS is starting small, and will be aiming for bigger fish as the file of precedents gets bigger.  The tax authorities may end up raking in a pile of money.

It would be interesting to know what percentage of house/apartment owners in the Hamptons, or the Adirondacks, or the Catskills or the five boroughs of NYC are out-of-staters.  If it’s over 10%, these tax rulings can’t be good either for the construction industry in these areas, or for property values.

It seems to me that anyone who might be affected should either turn the property into rental real estate–so the property can’t be construed as a residence–or sell, in order to stop from running up additional tax liabilities.  And the news is certain to make vacation home seekers think more fondly of the Jersey shore or eastern Pennsylvania.

Stay tuned.