SAN FRANCISCO (KCBS) – A threat from to cancel contracts with thousands of California companies in order to avoid collecting sales tax has drawn a sharp rebuke from California officials.

State lawmakers are pursuing a bill to start taxing California customers who submit orders online to companies with no physical presence.

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KCBS’ Doug Sovern Reports:

Currently it’s up to consumers to report those purchases when they file their income taxes. Companies with brick and mortar operations in the state already collect sales tax on online purchases.

“We can have fair competition by bringing Amazon on board with a tax collection obligation,” said Betty Yee, a member of the State Board of Equalization.

By some estimates, California loses $1 billion a year in revenue because most taxpayers do not voluntarily report the tax.

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Amazon believes forcing an online retailer to collect the sales tax is unconstitutional, and sent a letter to the Board of Equalization saying it would sever ties with 10,000 California sellers if the law is upheld.

Annette Nellen, a professor of accounting and finance at San Jose State University, said Amazon’s threat exposes a significant flaw in the legislation.

“Amazon just has to cancel all the affiliate agreements it has with California affiliates and they’re no longer subject to the law,” Nellen said.

Yee wants Amazon to wait for the courts to rule on whether the legislature’s approach is legal.

Amazon refused to comment beyond the letter.

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