NORTHERN CALIFORNIA INDEPENDENT BOOKSELLERS ASSOCIATION

HOLT UNCENSORED #140
by Pat Holt

book Friday, March 24, 2000:

PATENTLY AMAZON.COM
A WORD ABOUT THAT KING eBOOK

LETTERS

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PATENTLY AMAZON.COM

Thanks to Alyce Cresap for this morning's chuckle, the URL to User Friendly, an online comic strip whose "Patently Ridiculous" lampoon of Amazon.com can be found at http://www.userfriendly.org/cartoons/archives/00mar/20000305.html .

Taking its cue from the patentitous nature of Amazon.com, which claims ownership of software so nobody else can use it, the cartoon foretells the company's next seven steps.

With arrows pointing to the amazon.com logo, it shows new patents now granted for the letter "a," the color "orange" (used in the underbelly arrow that connects the "a" and the "z"), the use of drop shadows in logos, the "dot" in "dot.com", the SECOND use of the letter "a" and finally US Patent #71034579, for which the arrow points to the end of amazon.com with the explanation, "May as well patent the 'com' part as well."

Ah, bravo User Friendly! The cartoon couldn't be more in the spirit of Amazon.com's latest demonstration of openness and commitment to free exchange on the Internet.

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A WORD ABOUT THAT KING eBOOK

It's been great to watch the door yawn open to an entirely new (to many) era of electronic books, and I'm happy for Stephen King and Simon & Schuster that sales of "Riding the Bullet" shot through the stratosphere.

But let's remember the problem facing all books of whatever construction, paper or cyber: Each one has to find its audience, and if you're an unknown or an even moderately known author, it's getting tougher, not easier, to bring the written word to the marketplace.

The triumph of King's book is the fame, not the form, of King's "brand" - he's so commercially entrenched that he can sell his writings in any mode. When he goes to audio, the sales are enormous; when he took that motorcycle tour of independent bookstores, his fans followed him everywhere.

It's not that King opened the ebook door all by himself - as we learned from the Baen Books letter last time (and PW's 3/6 "Behind the Bestsellers" report on "Ashes of Victory"), science fiction readers have been meeting and buying works through "Webscription" on the Baen website for some time.

But King's ebook is the big breakthrough for general audiences, and with it comes the huge promise of the Internet: With online publication and sales of downloaded "product," you won't have to go out in the world and plant your physical being in front of bookstore audiences and media interviewers to promote the heck out of your book.

Instead, so many millions of people congregate on the Web that all you have to do is create a unique Internet identity with the right "metatags," and I'm not talking about washer-dryers, that can be read by every search engine in the WWW world, and your audience will come to you.

But since the key to many books' success is the quality of the writing (more than, say, the ideas or story presented inside), this unquantifiable, unmetatagable core of every book's literary essence needs an advocate. You've got to get the word out, and most often it won't spread without the help of professionals in the book biz readers have come to trust.

This brings us back to square one, independent booksellers, whose word is trusted, whose ability to handsell (on Earth and on the store's website) is rock solid, whose collective power to discover a good book and make a bestseller out of it has been demonstrated a hundred times.

You can talk about the Internet as the new sexy thang captivating millions and point to Stephen King all you want - and I'm one who's launched a new career on the Internet - but when it comes to independent booksellers who have been cultivating readers for generations and know how to help unknowns and moderately knowns find their audience, independent booksellers are not only the place to start, their existence is invaluable.

For this reason it was a little terrifying to see the way Simon & Schuster appeared to have discounted the importance of independent booksellers on the web when it came to distributing the King novella. It's not that independents could have done a "better" job than their slicker counterparts online; it's rather that they are still the key innovators, on web and off, who bring a unique and pivotal component to the bookselling process. That they should be left hanging while others flourished was too sad to contemplate.

At the beginning, as PW Daily reported: "By partnering with Softlock and that company's affiliate program, Simon & Schuster is able to attain 'wide retail distribution' " for the King ebook. This meant, PW said, "pretty much any site that isn't pornographic could sell the title."

What a great promise. But the independents I talked to got only a 3-day notice from the publisher about selling the King book and little help in gearing up for it. As one bookseller says, "they just didn't take us seriously." Another writes of following S&S "instructions" to call a phone number for tech support. "I called but no one bothered to pick up the phone."

As to working not as professional booksellers but as affiliates to Softlock, another bookseller pointed out: "I'm always suspicious when intermediaries get involved in web sales, because this usually is a signal for data mining. I don't know if that was the case here, but with the King book selling so cheaply, the temptation to look at this as a way to mine for customer information must have been very great. If a publisher would sell to us first and then let us resell to our customers, we can guarantee our customer's privacy. When we have to sell as affiliate of some intermediary, that intermediary (or the publisher) controls the data."

Of course, a lot of booksellers reported "not a single inquiry about the King ebook" and believe they would have lost money on the few sales they might have drummed up. But the point is that much of the Internet's potential lies in its we're-all-in-this-together spirit of everybody standing on this New Frontier, each with a special capability which, when connected to all the others, re-creates the World Wide Web.

I know there are some at S&S who see the independents as a vital connector in that Web; but given publishers' growing dependence on the seemingly easy numbers one can get at the chains and at online booksellers like Amazon.com, one wonders if the idea of flipping a switch and letting the Internet do the work hasn't proved blindingly seductive.

You can't flip a switch when it comes to the real work of launching those great books by unknowns; you have to turn to people willing to do the work, and these most often are independent booksellers. Inviting independents to participate in the direct sale of all literature, ebooks included, and giving them the support to do it, is one step in keeping the World Wide Web healthy and productive for everybody.

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LETTERS

Editor's Note: When I saw the following editorial by Dean Andal of the Board of Equalization in California, I suddenly realized what independents in California are up against in their attempts to convince the BOE that existing laws about sales tax should be enforced among online bookselling services such as Amazon.com, Barnesandnoble.com and Borders.com

The narrow-minded, I've-got-my-back-up-and-I-don't-care attitude of the Andal piece is so appalling that I asked bookseller/attorney Bill Petrocelli, who with other bookstore owners has been meeting with the BOE for months now, how he felt about it. His response follows the editorial (and I must say if there ever was a chance to step back "enjoy" a person flipping his lid in print, this eloquent response by Petrocelli is a top contender). And there's even a BIG TWIST to this story that follows Petrocelli's letter, so don't scroll too quickly.

Government Greed for Taxes Threatens Internet Shopping By Dean F. Andal (Published March 17, 2000 in the Sacramento Bee at http://www.sacbee.com/voices/news/voices04_20000317.html )

The explosive growth of the Internet and electronic commerce has created new jobs and access to a wide variety of products, services and information. But this revolution is in danger of being stopped dead in its tracks by greedy tax officials from state and local governments.

Under the guise of "protecting Main Street retailers," state and local governments are urging Congress to force Internet sellers to collect sales taxes wherever their customers are located. Congress is being asked to pass the equivalent of a $4.5 billion tax increase on consumers when 72 percent of Americans polled this month oppose such taxes. The scheme also would force Internet sellers to keep track of taxes in more than 30,000 local tax jurisdictions and file tax returns and be audited by states and localities they have never visited.

None of the arguments excusing this unjustified tax grab are supported by the facts. Electronic commerce is not a threat to local coffers. California, with the most e-commerce friendly tax laws in the nation, had sales tax revenue growth at an annual rate of 5.7 percent -- an increase of one-third in less than five years. This extraordinary increase in sales tax revenue came from traditional retailers of goods, despite Californians' huge appetite for Internet purchasing.

There is no evidence that e-commerce threatens adequate revenues for government services. Nor does the rise of e-commerce threaten small businesses. The Internet is the one place where small entrepreneurs can compete on equal footing with major corporations. A good idea and a nifty Web site allow a small bookseller to actually scare Barnes & Noble.

Internet retailers do not enjoy special "tax free" status. They are held to the same standard as everyone else and must collect taxes where they have a physical presence.

The U.S. Supreme Court in the Quill case held that one state cannot impose tax collection obligations on a business in another state unless that seller has a substantial physical presence ("nexus") in that state. The Quill decision recognized, as did drafters of our Constitution, that it is sometimes necessary to limit state authority to prevent the gridlock of interstate commerce.

From a retailer's perspective, the possibility of gridlock is not mere speculation. There are more than 7,000 sales and use tax rates in the United States, and about 700 changes occur in those rates every year. Keeping up with the appropriate tax rate (assuming you know where the customer is located) would impose a substantial barrier to the Internet marketplace. Americans do not believe that Internet businesses should devote their scarce capital and management time to tax compliance rather than growth. We should not greet a new Internet entrepreneur with a welcome wagon of tax-registration forms.

The U.S. Advisory Commission on Electronic Commerce, which is debating whether to tax electronic commerce, will hold its final meeting March 20 and 21 in Dallas. I will offer a proposal that instead would apply the principle of the Quill decision to the Internet and demand the same test -- a substantial physical presence in a state -- before imposing a sales tax. The definition of a physical presence would provide clarity, predictability and uniformity. It would prevent state and local governments from trying to claim that tangential operations, such as the maintenance of a Web site on a server in a jurisdiction, meet the Quill test.

Facts and the economic best interest of America, not fear and greed, should guide the decision of the commissioners and the future of e-commerce.

Dean Andal is chairman of the state Board of Equalization -- California's elected tax board -- and a member of the U.S. Advisory Commission on Electronic Commerce. His proposal is available at www.boe.ca.gov/members/dandal/eleccomm/eleccomm.htm .

Bill Petrocelli responds:

Taking the editorial part by part, let's look at Dean Andal's contention that "The explosive growth of the Internet and electronic commerce has created new jobs and access to a wide variety of products, services and information. But this revolution is in danger of being stopped dead in its tracks by greedy tax officials from state and local governments."

This statement is pure bombast. No one is trying to tax "services" or "information", and the only taxation of products that anyone is suggesting is the enforcement of existing sales tax laws. The "greedy tax officials" that Dean Andal is talking about are a myth -- almost no one has proposed a tax on the Internet itself. Local coalitions of responsible people are simply demanding that e-commerce companies pay their fair share of existing taxes.

Interestingly, Andal himself is a California tax official, but he prefers to ignore existing law and act more like a politician carrying the message for some well-heeled e-commerce interests. I guess greed is where you find it.

Andal says: "Under the guise of 'protecting Main Street retailers,' state and local governments are urging Congress to force Internet sellers to collect sales taxes wherever their customers are located."

Other retailers collects sales taxes where their customers are located, why shouldn't Internet retailers do the same thing? There's nothing duplicative or oppressive about such an idea. It's simply one customer-one tax, the same for retailers.

Andal: "Congress is being asked to pass the equivalent of a $4.5 billion tax increase on consumers when 72 percent of Americans polled this month oppose such taxes."

This is a pure political rant. You cannot call tax enforcement a tax increase. What Main Street businesses want is for Internet retailers to collect and pay the same taxes that they do. You don't call it a "tax increase" when the IRS starts collecting from some businesses that have been skipping out on their taxes. You call that "fair tax enforcement," and that's what it should be called here.

If more money is collected as a result of this fair tax enforcement, then the various states can, if they want, reduce the tax rates for all consumers and allow everyone to benefit from good tax enforcement. Mr. Andal is a member of the California Board of Equalization: He would be in a position to make this happen, if he were not so busy running around lobbying for one-sided legislation.

And Dean Andal is totally wrong about public opinion polls. Every poll on the subject shows that Amerricans think e-commerce companies should pay their fair share of taxes.

"The scheme also would force Internet sellers to keep track of taxes in more than 30,000 local tax jurisdictions and file tax returns and be audited by states and localities they have never visited."

This red herring is floated out every time someone tries to discuss the real issues. No one is suggesting that e-commerce companies should be required to file 30,000 or -- in most case -- even 30 tax returns around the country. The facts are these:

(1) existing law - if it were properly enforced by Mr. Andal's agency - only requires the large out-of-state retailers to collect sales tax in California. It's only these large companies that have a sufficient nexus in this state because of either the large number of affiliated retail stores (like Barnes & Noble) or a large number of sales associates (like Amazon). Thus, it is only the large e-commerce companies that would have to file any such tax returns - not the small, start-up companies.

(2) People who advocate fair sales tax reform always include tax simplification as part of the plan. The National Governor's Conference has a fair plan that would reduce the administrative burden down to one set of forms.

(3) Even if the administrative burden were to become slightly heavier on some large companies, why is that such a great worry? Amazon.com has programmed its computers to keep track of the tastes and whims of 16,000,000 or so customers; surely it has enough hard-drive space left over to keep track of the taxes in about 40 states (not the mythical 30,000).

Andal: "None of the arguments excusing this unjustified tax grab are supported by the facts. Electronic commerce is not a threat to local coffers. California, with the most e-commerce friendly tax laws in the nation, had sales tax revenue growth at an annual rate of 5.7 percent -- an increase of one-third in less than five years. This extraordinary increase in sales tax revenue came from traditional retailers of goods, despite Californians' huge appetite for Internet purchasing."

Whether he realizes it or not, Dean Andal just destroyed his whole argument with that statement. What he describes is a regressive tax that is getting more regressive.

Affluent computer users can currently find many ways to avoid paying almost any sales tax. But low-income people on the other side of the “digital divide” do not have that choice.

Approximately 70% of Californians lack at least one of the things you need to shop through e-commerce: i.e. (a) an up-to-date computer, (b) a phone line, (c) a contract with an Internet service provider, (d) a valid credit card, (e) a fixed location for delivery, and (f) sufficient education and skills to use such a system. These people end up shouldering more and more of the sales tax burden as their more affluent neighbors search for sales tax loopholes.

"There is no evidence that e-commerce threatens adequate revenues for government services. Nor does the rise of e-commerce threaten small businesses. The Internet is the one place where small entrepreneurs can compete on equal footing with major corporations. A good idea and a nifty Web site allow a small bookseller to actually scare Barnes & Noble."

What dream world does this man live in? It's clear that he has never tried to sell a book in his life. Just which small bookseller is actually scaring Barnes & Noble? How can we make our website so "nifty" it will have a multi-billion dollar company quaking in its boots?

Dean Andal says that everyone can compete equally on the Internet, but that is simply untrue. California-based Internet retailers are injured by this system just as much as brick-and-mortar stores. They must collect sales taxes on sales to their California customers, while the Amazons of this world avoid doing so. How do California businesses achieve fairness - by turning away from the large California customer base and concentrating on Nevada?

If Mr. Andal thinks that the 7.25% price advantage that the big e-commerce companies have when they sell goods tax-free doesn't give them an unfair advantage, perhaps he won't mind spotting his opponent a 7.25% advantage the next time he comes up for election.

Holt barges in: Okay, here's the big twist: The BOE won't enforce the law with the big guys (the chains and online-only booksellers like Amazon) but they will quite hypocritically go after a little guy - a distributor who apparently can't hurt them politically. And they will do it USING PETROCELLI'S EVIDENCE, as Bill points out in a white-hot letter to members of the BOE below. This is such a ghastly turn of events that I include Petrocelli's complete letter in case other booksellers in other states run into similar intransigence with their BOEs.

Johan Klehs, Chairman, Board of Equalization
Dean Andal, Board of Equalization
Charles Parrish, Board of Equalization
John Chiang, Board of Equalization
Kathleen Connell, State Controller

Dear members of the Board of Equalization

I am writing to all the Board of Equalization members, because I don't know what else to do to get fair treatment from your agency.

Whether you realize it or not, your agency is operating under a serious double standard. It is applying a very strict set of rules to smaller California retailers and to those who supply them, while at the same time it is applying a very lax, apologetic standard to the large e-commerce companies that are competing against those small retailers. In the case of the book business, you are allowing Amazon.com, Barnesandnoble.com, and Borders.com to violate the law and not collect sales taxes, but you are pressuring unreasonably companies who supply vital services to small, independent bookstores.

Several independent booksellers have met with the BOE staff, and we have provided your agency with a great deal of factual information about these issues. I have written your agency several times. I sent a long letter to David Levine, your chief counsel, on November 17,1999, and copy of this letter was sent to each of you. I also sent another letter to Mr. Levine on March 7, 2000, and I am enclosing now a copy for each of you. I have received nothing but perfunctory replies to the issues I have raised in those letters.

***Now I have received clear indication of the double standard that is at work in your agency. I recently talked with a small, out-of-state company that supplies independent bookstores with specialized computers and computer services. The president of the company told me that he was being heavily pressured by your agency to collect sales and use tax on anything sold to California bookstores. The reason for the pressure by the BOE? His company apparently retains one person who occasionally solicits business in California and who occasionally helps train bookstores in California on the use of the equipment. He shared with me a copy of a BOE notice that was sent to his company, which is labeled BOE-7 REV 9 (1-99). In that notice your agency cites Calif. Rev. & Tax Code, section 6203, as well as the U.S. Supreme Court decision in Scripto, Inc. v. Carson, 362 U.S. 207. This notice concludes with the statement that the BOE can force his company to collect sales tax because "the use by seller of independent commission agents with a state [is] sufficient nexus with that state to permit the state to require the seller to collect use tax."

***This action by your agency is truly appalling. Given the conversations I have had with your agency and the lack of response to the facts that I have presented in my letters, it is astonishing that your agency is taking this action. The issue is not whether you are correct in trying to collect sales tax from this company in this particular instance. The issue is that you have ignored the exact same argument that has been presented to you in great detail with respect the far greater tax evasion by Amazon.com, Barnesandnoble.com, and Borders.com.

***In my November 17, 1999, letter and again in my March 7, 2000, letter I laid out in full detail the extent to which Amazon.com, Barnesandnoble.com, and Borders.com are using “independent commission agents” to solicit sales in California on a massive basis. I cited and analyzed Calif. Rev. & Tax Code, section 6203 at length, and I further pointed out that these three e-commerce firms were engaged in the exact type of activity referred to in Scripto, Inc. v. Carson. But unlike the minor activity of our computer supplier, these three companies are using such agents on a massive scale in this state.

***Amazon.com alone, using a sales process that has now received a U.S. patent, has an estimated 40,000 such agents in California actively engaged in promoting sales. Many of these in-state agents are large companies that employ several California employees to solicit business both on-line and through traditional, face-to-face sales activity.

***How can you ignore the activity of these large e-commerce companies and at the same time pursue one small supplier that provides an essential service to the California businesses that are trying to compete against those companies? If I were in a charitable mood, I might assume that one hand simply doesn't know what the other hand is doing. But unfortunately it appears that the tax collection process has gotten politicized to the point where small retail businesses in California cannot get fair treatment.

California retailers are not the only ones who are hurt by this. When your agency allows large, e-commerce companies to escape their tax collection responsibility, you are depriving state and local agencies of tax revenue. You are also harming low income residents of this state, who do not have the means to engage in electronic commerce, by forcing them to bear and ever-increasing share of the sales tax burden.

No one is asking you to impose any new tax liability on internet businesses. No one is asking you to go beyond what is stated in the Calif. Revenue & Taxation Code or to violate any constitutional restrictions. We are simply asking you to enforce the law and make everyone play by the same rules. You have the authority to require our major competitors in the book business to collect sales taxes, and you have a moral and legal obligation to do so.

Sincerely yours,
William Petrocelli

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