Amazon and the Sales Tax--It's The Constitution, Stupid

Most residents of California, as well as selected other states are aware of the struggle involving Amazon.com and other online retailers over the collection of sales tax. This has resulted in a strange set of bedfellows and combatants, as businesses and consumers take different sides of the issue depending on whose ox is being gored. But despite what you might hear from the media and politicians about fairness, tax loopholes and what's right, this is first and foremost a question of constitutional law and federal power over interstate commerce.

To narrow the legal issue, instead of focusing on Amazon.com or Overstock or whomever, just say you're a California resident who likes to keep your closet clean, so you regularly dispose of clothing you no longer wear. Perhaps in the old days you gave them away to Goodwill, but more recently, you've been going on EBay and selling these items to people around the country. So let's look at that pair of shoes you sold to a buyer on Kodiak Island. Do you have to collect Alaskan sales tax on that transaction and remit it to the Alaskan government, or for that matter, pay income tax to Alaska on any profit you made? Of course not. The reason is that you're here in California and Alaska has no jurisdiction over you, and under the U.S. Constitution they cannot make you collect or pay tax. Of course, this transaction is not tax free. Alaska, like any other state, requires the buyer to remit an equivalent "use tax" on the retail purchase of goods where the seller is beyond the state's jurisdiction. But for some reason, people just aren't as diligent in paying their state use tax liability as they are in paying state income taxes. (Fortunately I make few online retail purchases, so I don't need to confront that dilemma.)

So for the same reason you don't pay taxes to Alaska, neither does Amazon.com. Now you might think that Amazon.com is bigger than you are, so they should be required to collect sales or use tax on sales to Alaskan residents where you aren't. But don't forget we are talking Constitutional principles here, and under the Constitution size doesn't matter. Under the most recent constitutional interpretation by the Supreme Court, unless a seller is physically present in a state, it is not liable to collect sales and use tax.

Of course the states know this, so how can they try to make Amazon.com collect their taxes? Well, by redefining physical presence in their state. The most common attack is the click-through referral. If a California resident is an Amazon affiliate and has a website that links to Amazon's, and if Amazon pays the Californian a fee for each click through, California says Amazon is present in California in the person of the affiliate. Now this isn't entirely far fetched, as a taxpayer may be present in a state by employing independent contractors, e.g., using a warehouse in the state owned by a third party to deliver local sales. However, using a California affiliate click through does seem to stretch the concept of presence pretty far. (California has set a minimum $500,000 sales threshold so most of you Ebay sellers are safe.) In any event, Amazon merely avoids this potential presence by getting rid of all of its California affiliates, so in the end it may be that these associates suffer the most. California also says that because an Amazon subsidiary is located in California, which is charged with Kindle research, that there is attributional presence in California. This is a more interesting approach that could possibly be upheld by a court, as are other activities which Amazon may engage in under an economic presence concept applied by a target state.

Now there are any number of ways this dilemma will play out. Amazon is trying to have California voters approve a ballot initiative to repeal the new California law. California is proposing a new version of the law that would forbid contrary ballot initiatives. Congress does have the power to pass legislation that would require the Amazons of the world to collect the tax with some minimal level of economic presence. Or the Supreme Court may or may not reinterpret the constitution to align with computer age business practices (certainly Justice Scalia wouldn't go for this) and discard the physical presence test for an economic presence test. Only time will tell who wins this Amazon battle.

The Fallacy of Citibank's Reverse Stock Split

Stock splits may be one of the more misunderstood subjects when it comes to the stock market. Announcement of a stock split is usually hailed as good news, supposedly because it lowers the price of the stock, making it more "affordable" to future potential investors. However, most informed observers understand that this is silly, particularly when viewing the ownership of a corporation as a pie, and the shares of stock as slices of the pie. No matter if the pie is divided into ten million pieces, or after a two-for-one split, twenty million pieces, the value of the pie is the same, and the relative value of shares is unaffected by the split (or lack of split). The fact that Berkshire Hathaway doesn't split and trades for $100,000 a share belies the argument that it's bad for a stock's share price to get too high.

There is, however, one situation where a stock split does affect the total valuation of a company, and the surprising thing it's the corporation itself that seems to be oblivious to this fact. This is the case of the reverse split, where multiple shares of stock are surrendered for a single share. In the stock market there is a stigma for companies whose shares are priced too low. As such, there may be a temptation for a company to try to eliminate this stigma via a reverse split. However, in many cases the reverse split is detrimental to the shareholder of the company. The reason is that while the value of a share of stock is generally based on the allocable fractional value of the entire corporation, there is also some residual value to a share of stock as a trading vehicle. This is demonstrated by the shares of ghost companies, companies that have gone through bankruptcy, with liabilities well in excess of assets and shareholder equity clearly being wiped out. Yet shares of these companies can trade at 20, 50, or even 75 cents per share. Obviously, there is no corporate value to these shares, merely the value as a trading vehicle. In most cases this trading value is negligible compared to the corporate value, but in the case of a lower priced share of stock it could have some significance.

It is with this background that I laughed when Citibank announced a 1-for-10 reverse split to enhance its share price. At $4.50 per share, the stock price for this corporate giant was embarrassingly low, and cutting the outstanding shares by 90 percent would price the stock at a more prestigious $45. However, I knew that part of the $4.50 was the trading value, which would be lost after the reverse split. Sure enough, Citibank dropped over $1.50 per share on its first post-reverse split day of trading. And today? Citibank is trading at $30, briefly trading around $28 earlier this week. Obviously the stock would have fallen in any event. But the fact is that Citibank stock has never exceeded its opening post-reverse split price, and while they may now have the prestige of being a $30 stock, they also cost their shareholders quite a bit of money.

Apologies To Los Angeles--Vancouver Chinese Food Is Not So Superior Any More

For many years my dream vacation has been to go to Vancouver (specifically, the suburb of Richmond, B.C.) to partake of the wonderful Chinese food there. From our visits to Vancouver in 1993 and 2004, we learned that Vancouver Chinese food was far superior to that in Los Angeles. The fast food at any random food court stall in Richmond was head and shoulders better than what we were used to here at the best sit-down Chinese restaurants in Los Angeles. After our 2004 trip, my daughter expressed the sentiment that when she got married she wanted it to be in Vancouver, so she could throw her wedding banquet at a Vancouver Chinese restaurant. Consequently I have always been the first to extoll the virtues of Vancouver Chinese food and the comparative weakness of Los Angeles Chinese food.

I really thought I'd would have returned to Vancouver sooner than this year, but things never fell into place. So when this year's visit was finalized I was very happy to return to the land of milk and honey. However, there was one nagging thought in the back of my mind. Chinese food in Los Angeles had clearly improved since our 2004 visit to Vancouver. Was that improvement, obviously gradual over the years, so much that Vancouver wouldn't be the knock your socks off experience that it had been the last time?

In fact there were little clues that perhaps the gap had closed. My daughter visited Vancouver last year and reported that she wasn't blown away like in 2004. However, perhaps that was attributable to the fact that she did not have the guidance from Mrs. Chandavkl's third cousin who had shown us around 2004 and knew all the best dishes at all the best Vancouver Chinese restaurants. Also, one of my foodie friends who used to visit Vancouver frequently for Chinese food (but hadn't been there recently) indicated that there was no longer the influx of Hong Kong Chinese to Vancouver, which was the event that fueled the development of Vancouver's superior Chinese cuisine. In addition in my visit last year to Toronto, which some observers indicate had caught up to Vancouver for quality of Chinese cuisine, I found Chinese food that was better than Los Angeles, but not by a wide margin. And, I had read commentary on a restaurant message board that the Chinese food in San Francisco had almost caught up to Vancouver. Given that Los Angeles Chinese food is clearly better than San Francisco, this was more evidence that the clear dominance of Vancouver was over. On the other hand, my pre-trip survey of what appeared to be the best Chinese restaurants today in Vancouver contained only one repeat from the listing from our last visit, Sun Sui Wah, so perhaps new contenders had raised the Vancouver bar higher.

Once again, Mrs. Chandavkl's third cousin took us to the best of the best and we had many outstanding meals that exceeded what we can get in Los Angeles. Most notable was our meal at Landmark Hot Pot House on Cambie St. in Vancouver, where we had a meal to remember. I always considered shabu shabu/hot pot to be "meh", but this meal was indescribably delicious. The meal started with oil being squirted on a live lobster and live crab each in its own pot, the oil being lit, and then the addition of stock to the pot after an initial cooking period. I don't know what it was--the stock, the dipping sauces, or the fresh ingredients such as fresh fish, marbled beef, thin sliced Japanese pork, bean curd sheets, oysters, clams, fish balls, etc., but it truly was a magnificent meal.

However, my conclusion is that while Vancouver is still better when it comes to Chinese food, and I'm not going to turn down future opportunities to go there and eat, but the difference between there and Los Angeles is only incremental now. Indeed, for "ordinary food," meaning most dishes that are available in both cities, while the Vancouver average is above the Los Angeles average, not every good restaurant in Vancouver is necessarily better than any good Chinese restaurant in Los Angeles.

Now where there is still a big gap is for food items in Vancouver that are not available in Los Angeles. Besides the Vancouver style hot pot we had items such as honeydew tapioca, three mushroom bean curd rolls, fried egg white balls, Cajun beef, fried bread with sweet cream, and other innovative dishes which were heavenly. And the prospect of these kinds of dishes alone continues to make Vancouver enticing. But after our last visit to Vancouver in 2004 I literally did not eat Chinese food in L.A. for a month because it would be such a letdown. However, that's certainly not the case this year.

Los Angteles Mayor Villaraigosa and Police Chef Beck Embarrass LAPD

It's easy to blame the LAPD for botching the Dodger beating case and erroneously fingering Giovanni Ramirez as the perpetrator. But really, the only blame belongs with Mayor Villaraigosa and Police Chef Beck for creating the hoopla that identified Ramirez as a suspect the time. Ramirez was never charged with the Dodger beating. Naming a person publicly as a suspect typically does not generate the fanfare of a civic press conference to declare that the case had been solved. However in what can only be described as shameless famewhoring, that's what the mayor and police chief did. If they hadn't stuck their noses in front of the cameras, the arrest of the real perpetrators would not given LAPD the black eye it has received.

In a city which probably has the highest percentage of resident famewhores in the world, Mayor Villaraigosa ranks at the very top. Yet, this isn't the mayor's most extreme case of forcing himself into the spotlight. That occurred when the Lakers won the 2009 NBA championship and during the team parade Villaraigosa sneaked onto the team bus to stand side by side with Kobe Bryant during the procession. Read the disgusting details at http://www.nbclosangeles.com/news/sports/Villaraigosa-Tried-To-Steal-Kobes-Spotlight.html

But actually the mayor's penchant for the spotlight is not the most disturbing thing since he is, after all, a politician. What particularly troubles me is that the mayor gives the image of a smart and knowledgeable individual, where within the city government it is known that he in fact is not terribly bright. I do admire Villaraigosa for transforming himself from a high school truant, making it to UCLA and after graduation, law school. But it bothers me that a person who is so articulate, glib, and seemingly well versed on many topics, can fool the public when in fact he is no Bill Clinton or Barack Obama on the intelligence scale.

Of course you could speculate that those who question his intelligence may have their own agenda. But the fact is that he did flunk the California Bar Exam four times. Now the California Bar is not exactly the toughest test in the world. Indeed when I took the bar review course before sitting for the bar, they taught us that the number one objective was to write an exam where the bar examiners did not laugh at you. Now anybody can flunk the bar exam once. Stuff happens. But when somebody goes zero for four on the bar exam, that's pretty much proof to me that the person is not a mental giant.

But really the fact that the mayor can portray the image of being more capable than he is doesn't bother me that much, if it were an isolated instance. However I know of another city politician with a similar profile. This longtime politician was frequently seen in the media, expounding intelligently on a number of different issues. Yet somebody who worked closely with this person described them as being as dense as a rock. So if I, who am generally unconnected to our public officials, know of two not-so-bright politicians who seem to know what they're talking about, how many more of them are there out there? Now that's something to be worried about.

Carmageddon--Christmas In July

As I had hoped, the parallel to the Bay Bridge closure a couple of years ago did hold up when the 405 Freeway was closed for bridge removal this past weekend. One of the best descriptions of how Carmageddon really turned out was "Christmas In July." However, I think the best meaning of this description is not necessarily the one intended by the person who coined it. Yes, Carmageddon was Christmas in July as Los Angeles had a weekend full of free flowing traffic. This has led to the next question of why it can't be like this all the time, or at least on an occasional basis. This is where "Christmas in July" hits the nail on the head. Christmas, the wonderful time of year when most everybody is happy and people are nice to each other, can only come once a year, when people are ready to depart from their normal everyday behavior to be happy, jolly and nice. So too, Carmageddon was a radical departure from most people's behavior pattern as people basically stayed home. Freeway traffic throughout the Los Angeles area was down by two thirds. The beaches were empty on a sunny California weekend. Restaurants and stores were empty, to the extent that in Westwood Village businesses closed down on early on Saturday due to a lack of business. Even traffic in Orange County, dozens of miles away from the Sepulveda Pass, was significantly lighter. Most stunningly, the canyon roads between the San Fernando Valley and West L.A., which are typically overflowing even when the 405 freeway is open, were hardly traveled when the 405 was closed. We truly witnessed abnormal behavior which will be difficult to replicate. Indeed, when Carmageddon II occurs in a year for a similar closure of the 405 freeway, will it be like the boy who cried wolf and true chaos next time around? Who knows.

Why Chinese Restaurants Change Their Names

Obviously stability is quite low in the restaurant community in general and Chinese restaurants in general. One tenant space in San Gabriel has had 14 or 15 different Chinese restaurants in a 20 year period, an especially staggering statistic when considering that one of these tenants kept the space for nine years. Chinese restaurants change names for various reasons--the restaurant is sold to a new owner and the name is not part of the transaction, the lease expires and the landlord refuses to renew it and re-leases the space, the restaurant plain goes out of business and a successor is found etc. etc.

One interesting subcategory is where the name of the restaurant changes, but the restaurant's operation appears unchanged, with the same menu, same waiters, and so on. Sometimes the name change is hardly noticeable, such as a slight change in the spelling of one of the words in the restaurant name. A good reason for this type of name change would be a change in the ownership lineup, even a small one, as Chinese restaurants often have multiple owners, and a slight change in name could be notice to creditors that there are new owners, or perhaps even a new legal entity involved.

Then again, there are the more nefarious reasons for these name tweaks. Sometimes the change in name indicates a new ownership entity, as noted above, but brought about by the desire to stiff certain creditors. Now few creditors are dumb enough to continue to do business with a successor entity if the the predecessor entity has skipped out on their obligations. But there is one category of creditor who is dumb enough to not ask any questions--the government. An accountant who handles a number of Chinese restaurant clients told me that it is not uncommon for a Chinese restaurant to fold up its legal entity and reincorporate into a new one for the express purpose of stiffing the government of unpaid sales tax proceeds. You'd think that the government would be smart enough to figure out the connection between old and new restaurants, particularly with similar sounding names, at identical locations. But clearly this is not the case.

A casual conversation with a waiter at another Chinese restaurant suggests another scam. One day, a popular, longstanding restaurant changed its name to something radically different. Being only an occasional visitor to the eatery I couldn't tell if there were any changes besides the new signs and new menu, so I asked the waiter in charge if this was the same place. He said that it was, then rather cryptically said that when you have been in business for a long period of time, sometime the government makes you do these things. My best guess is that he was referring to the unemployment tax rules, where the taxes the employer pays is based on the magnitude of employee claims for unemployment made against the employer. Now, if you're a brand new business you have no past experience of unemployment insurance claims which can be used to set your rate. So brand new employers are assessed at an arbitrary rate, but a rate which may well be less than that paid by existing employers with an experience rating. Consequently, it can pay for a longstanding Chinese restaurant which may have a high experience rating to go out of business, set up a new entity, and start all over again. Of course there are laws against such a change of identity for the purpose of lowering one's unemployment tax rate, but apparently here too, the government is asleep at the wheel.

Carmageddon is Coming!

Here in Los Angeles you can't turn on the radio or television, read the newspaper, or even drive on any freeway in the region (including the San Joaquin Valley!) and not know about the upcoming closure of a 10 mile stretch of the San Diego Freeway for the entire weekend of July 16 (including late Friday night and early Monday morning). And it's not any 10 mile stretch of the I-405--it's the stretch between the Santa Monica Freeway and the Ventura Freeway, which practically speaking is the only route that connects the San Fernando Valley and West Los Angeles.

Given the car culture of Los Angeles where people will drive two blocks to go to the gym, this portends a traffic jam of massive, if not biblical proportions. I remember maybe 10 years ago when a traffic accident closed the Hollywood Freeway for several hours on the portion that connected Hollywood to the San Fernando Valley. That created the worst single point traffic jam that Los Angeles has ever seen (the overall congestion for the 1992 riots was worse). Since the accident blocked traffic from going from Hollywood to the Valley, when I left my office in West Los Angeles and headed home to the Hollywood Hills, I didn't think I'd be affected since I was going completely in the opposite direction, and nowhere near the San Fernando Valley. Wrong. Cars looking for a way, any way to go west and north into the Valley clogged the streets in my eastbound direction, as they drove round and round in vain for a clear path home.

Now the San Diego Freeway is not literally the only way to get from West Los Angeles to the Valley. There's Sepulveda Blvd., which largely parallels the freeway. But wait, Sepulveda will be restricted, too. Presumably those working on the freeway construction need that street for their own access, as well as local access for neighborhood residents. Also, there are the canyon roads like Beverly Glen, Coldwater Canyon and Laurel Canyon that connect the Valley to the Westside. Plus there are those secret residential shortcuts that can get you from here to there if you know where to make the correct turns. But no way can they handle more than a small portion of the traffic between the Valley and the Westside.

Optimistically our city fathers point to the 1984 Olympics as demonstrating that advance warning as to potential traffic gridlock will lead to smooth flowing traffic as people avoid the trouble spots in droves. Actually, I think a better precedent is in the Bay Area, when the Bay Bridge between San Francisco and Oakland was closed for Labor Day a couple of years ago, and traffic turned out to be fine. Theoretically that should have been worse since there are fewer ways to cross San Francisco Bay than to get between West L.A. and the San Fernando Valley. Hopefully that will be the best portent of what will actually happen.