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Skinner: Tax online retailers with Calif. networks

By Josh Richman
Monday, February 2nd, 2009 at 3:50 pm in Assembly, Nancy Skinner, state budget, taxes.

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.

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  • kevin

    Politicians whining about losing money. How many Californians are losing their jobs? their homes? Maybe we could focus on the governments penchant for spending in all the wrong places

    Maybe the politicians should start losing their jobs and homes.
    I constantly hear in the media that our state officials complain about money not coming in to help.

    Our state has 1 of the highest tax rates in the nation. We are losing jobs and homeowners at an unprecedented rate. State revenue is down because people cannot afford to spend money as they once did.

    The answer to that for our governent——-its not a budget that spends within its means. NO, instead, the elected officials are trying to squeeze blood out of a turnip. Officials want higher taxes and less loopholes.

    The government needs to curb spending but it seems they just want more of your money. When the economy recovers, so will tax revenue. Oh wait, many police precincts are giving out 90% more tickets than last year to generate revenue.

    Californians are spending a lot less, yet the government doesn’t think they should be collecting less, there exists the disconnect.

  • Elwood

    Skinner shows her true colors as a tax and spend liberal democrat when she says: “we cannot afford to lose sales tax revenue”

    It ain’t about leveling the playing field.

    It’s the revenue, stupid!

  • Still Waters

    Skinner is a fearless leader who is willing to stick her neck out to find novel ways to address revenue shortfalls in California.

  • ted ford

    if brick and mortar sellers have to bear the sales tax , why shouldn’t internet sellers be subject to the same.

  • http://nciba.com Hut Landon

    Mr. Nicely conveniently ignores several facts in his standard knee-jerk reaction to the internet tax issue. First and foremost, the existing California sales tax code states that nexus is established with sales agents and affiliates in the state. To say that Amazon, the biggest player, is merely “advertising their existence” in the state is an insult to people’s intelligence. Amazon’s web of commission-based programs extends into thousands of web sites, from schools and non-profits to authors and public agencies. These web sites specifically promote and drive business to Amazon in exchange for commissions — exactly what the tax code defines as nexus.

    As for job losses, those have already occurred by the hundreds, as Amazon’s government-subsidized 8-8.5% discount has given them a huge competitive retail advantage and helped push dozens of bookstores and other small retailers out of business.

    He also asserts litigation will be costly. By our estimates, based in part on New York’s careful analysis, Amazon alone has in the last five years cost the state about $50 million a year in lost sales tax. That’s the real cost.

  • http://www.CAaffiliates.com/ Mark Welch

    Mine is one of the jobs that will be lost if this law passes. I am a web publisher, and I earn my living here in Hayward, California from nationwide advertising that appears on my web site. When the New York law was passed, other web publishers like myself were “expelled” by merchants who did not wish to assume the substantial costs of collecting and remitting sales tax from all California residents. If AB 178 is enacted, those same merchants will expel all California residents from their programs also, losing many millions of dollars of income for many thousands of people.

    There’s a lot wrong with this law, but at the top of the list is the trivial amount of revenue this will actually produce, compared to the huge costs to California’s residents (and lost income tax revenue). In addition, only “large” internet retailers are likely to comply with the law, because thousands of smaller out-of-state firms have already ignored the New York law, and California’s FTB cannot possibly determine which firms “should” be covered by the law and which are exempted.

  • 4Antioch

    Everyone should be asking their city/town council members and county supervisors (and all candidates for those offices) if they support the Streamlined Sales and Use Tax AGREEMENT (SSUTA) since organizations like the League of California Cities and the CSAC has been actively working to get such an agreement while not telling their constituents or reporting it publicly at city council and board of supervisor meetings.

    If the constituents found out, they might well be ready for a real tax revolt!

  • http://stephenjacksonmakeslovetopressure.com jaxfor3

    #6 is correct in that this bill hurts online advertisers the most. Read the italicized text carefully. The bill only taxes retailers making more than $10,000 in California sales if they do business with affiliates in the state.

    The retailers only need to stop all affiliate business in California and turn to out-of-state affiliates to market their websites to California consumers. So there would be no dropoff in revenue for the retailers, they won’t have to pay the sales tax in the following year, and thousands of affiliates based in California lose their business.

    Thank you Nancy Skinner and Charles Calderon for screwing the little guy.

  • http://forum.abestweb.com/forumdisplay.php?f=536 Mark Welch

    The author acknowledged drafting problems with this bill, and promised an amendment, but then abruptly dropped it from the hearing calendar.

    This week, the language was re-inserted into the California budget bill, apparently to claim the promised $149.5 million in increased sales-tax collections.

    Amazon responded today by announcing that if California enacts this provision, it will terminate its advertising relationships with all California web publishers, and thus won’t be required to collect sales tax under this provision. That means no new revenue, but a huge loss of income taxes paid by California web publishers on the advertising income that Amazon currently pays them.

    http://forum.abestweb.com/forumdisplay.php?f=536

  • Steve Ratner

    Politically, I agree with you Nancy.

  • Elwood

    I don’t know that much about Calderon, but Skinner is demonstrably dumber than a rock!

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