Assemblywoman Nancy Skinner, D–Berkeley, today introduced a bill to levy sales taxes on certain out-of-state Internet businesses making sales in California.
Assembly Bill 178, she said, is a stab at “leveling the playing field for California’s brick and mortar businesses” by requiring that out-of-state companies “which maintain a network in California and thus have a presence in the state” would have to collect sales taxes on orders received within the state.
Although her office couldn’t provide a copy of the bill Monday, she said it’s modeled closely on a similar law enacted in New York; that law says an internet retailer’s affiliates based within the state qualify as a “physical presence” or “nexus” — the U.S. Supreme Court’s standard on whether online retailers are subject to sales taxes in a given state.
“This legislation will close the current loophole in California tax law which has allowed out-of-state companies to avoid collecting California sales and use tax,” Skinner said in her news release. “During this unprecedented fiscal crisis we cannot afford to lose sales tax revenue from out-of-state companies when our own local businesses are struggling to keep their doors open.”
Skinner’s bill – co-authored by Assembly Revenue and Taxation Committee chairman Charles Calderon, D-Montebello – would exempt businesses doing less than $10,000 worth of business per year in California; she estimates the bill would raise about $55 million in revenue per year.
Amazon.com had helped lead a court battle challenging New York’s law, but a judge dismissed its lawsuit last month. An e-mail seeking comment from the Seattle-based online retail giant wasn’t immediately answered today, but there’s no question that Skinner’s bill targets this company just as New York’s seemed to do.
“This bill helps preserve businesses and jobs in our communities,” Hut Landon of the Northern California Independent Booksellers Association said in Skinner’s news release. “Independent booksellers have been hammered by unfair tax competition from Amazon for over a decade. And as Amazon has expanded its retail reach, more and more locally-owned businesses are faced with unfair competition. We welcome this effort to level the playing field for all retailers.”
UPDATE @ 9:55 A.M. TUESDAY 2/3: Click here for a copy of the bill. And although Amazon.com declined to comment, the Council on State Taxation sent me a note tearing the idea apart. Read COST’s stance, verbatim, after the jump…
From COST Tax Counsel Fred Nicely:
The Council On State Taxation (COST) believes the nexus standards placed in Assembly Bill 178 represents poor tax policy and violates the Commerce Clause of the United States Constitution. COST has the same view of Assembly Bill 27 that has similar language to that in Assembly Bill 178 with the addition of expanding nexus to include independent contractors that provide repair services. This expansion of nexus to include repair services is based on the Multistate Tax Commission (MRC) Nexus bulletin 95-1 issued back in 1995. While California has previously entertained adopting the nexus bulletin, to date California has not adopted that position. COST continues to believe the MTC bulletin along with the solicitation of sales over the Internet proposed in the bills goes against the states’ efforts to simplify the sales and use tax laws, is unconstitutional, waste audit resources that can be productively spent elsewhere, and will negatively impact California’s employment. More detail on these points is proved below.
SSUTA. COST understands the desire for states to collect their sales taxes from remote sellers; this issue is not unique to California. However, if California wants to accomplish this it should work with other states (with whom COST and other businesses are engaged) and pass legislation to become a full member of the Streamlined Sales and Use Tax Agreement (SSUTA). The states involved in the SSUTA are working to simplify and make their sales tax laws more uniform. Adding California as a full member state to the SSUTA would significantly assist the SSUTA states in seeking federal legislation to require remote sellers to collect the member states’ sales taxes. That would prove to be a constructive initiative in accomplishing the same goal that California cannot constitutionally achieve by enacting Assembly Bills 27 or 178. Along those lines, COST fully supports Senator Ducheny’s Senate Joint Resolution No. 1 calling for California’s congressional delegation to join as cosponsors of the federal legislation.
Unconstitutional. Federal restrictions, dictated by the U.S. Supreme Court in interpreting the Commerce Clause, are clear when it comes to the nexus threshold that must be met for a remote seller to be subject to a state’s collection and remittance responsibilities for sales tax. That standard is physical presence; see Quill Corp. v. North Dakota, 504 U.S. 298 (1992). As for employing agents or independent contractors to assist in making a sale, the U.S. Supreme Court restricted any requirement for a remote seller to collect and remit the tax to persons who physically took orders from buyers in the taxing state; see Scripto, Inc. v. Carson, 362 U.S. 207 (1960). This legislation impermissibly requires remote sellers with no physical presence in the state to collect and remit tax based on merely advertising their existence in California.
Wasted Expenditures & Resources. Litigation for both the State and taxpayers is costly. As discussed above, the State will inevitably incur the cost of defending this unconstitutional law. The decision in the New York Amazon.com case is a lower court decision and has not been affirmed by New York’s highest court, the New York Court of Appeals. Further, protracted litigation will occur to determine whether a remote seller “directly or indirectly” was able to obtain sales through a resident of California who assist in soliciting such sales. This is hardly a precise standard. Lastly, resources spent by the California State Board of Equalization in pursuing those subject to tax under these new provisions translates into lost opportunity costs in not having the Department seek the collection of tax from those the State can permissibly tax.
Job Losses. While it may not have been intended, this provision works against advertisers located in California. Remote sellers will challenge their obligation to collect and remit California’s sales tax based on this provision. However, respecting this new provision, such sellers would likely send their advertising dollars to advertisers located outside of the state. Additionally, the technology sector in California would be negatively impacted as remote sellers would reconsider using websites hosting services in California.