BILL ANALYSIS
AB 81
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Date of Hearing: May 2, 2001
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Carole Migden, Chairwoman
AB 81 (Migden) - As Amended: April 17, 2001
Policy Committee: Revenue and
Taxation Vote: 6-1
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill clarifies the application of the sales and use tax law
to retail sales processed electronically. Specifically, this
bill:
1)States that the processing of orders electronically, by fax,
telephone, the Internet, or other electronic means does not
relieve a retailer from the responsibility for collection of
the sales and use tax if the retailer is engaged in business
in this state (i.e., if the retailer has sales and use tax
"nexus.")
2)Clarifies that an Internet retailer is presumed to have an
agent in this state (and therefore have nexus) if:
a) The Internet retailer is affiliated through ownership
with a California retailer, and
a) The Internet retailer sells the same or a substantially
similar line of products as the California retailer under
the same or a substantially similar business name, or
facilities or employees of the California retailer are used
to advertise or promote sales by the Internet retailer to
California consumers.
1)States that the bill is not intended to extend or broaden the
definition of a retailer engaged in business in the state, nor
to affect any investigation, audit, or other enforcement
action by the State Board of Equalization that was initiated
prior to January 1, 2002.
AB 81
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FISCAL EFFECT
This bill clarifies existing law and would not change the sales
and use tax liabilities of retailers, but would encourage
greater compliance with the sales and use tax law by retailers
and more vigorous enforcement by the Board of Equalization
(BOE). The BOE estimates that this bill would increase state
General Fund use tax revenues by approximately $10.3 million
annually and local use tax revenues by $6.4 million annually.
COMMENTS
1)Background . The Revenue and Taxation Code requires a retailer
to collect the sales and use tax on sales of tangible personal
property if the retailer is "engaged in business in this
state." The criteria specified in Section 6203 of the Revenue
and Taxation Code for reaching this determination of sales and
use tax nexus focus on whether the retailer occupies
business-related property in this state or employs
salespeople, directly or through an agent or subsidiary. The
logic behind this provision of law is that retailers with
stores and personnel in California benefit from government
services and should not be able to avoid collecting taxes that
finance those services simply because a customer order is
executed through the mail or over the phone lines.
Many if not most retailers operating in California interpret
Section 6203 of the Revenue and Taxation as requiring the
collection of the sales and use tax on Internet sales.
Companies such as Macy's, WalMART, REI, Hewlett-Packard, and
Eddie Bauer all collect sales and use tax on Internet sales.
Yet other retailers with a physical presence in California do
not collect the sales and use tax on Internet sales -
companies such as KB Toys, Gateway Computers, Radio Shack,
Borders Books and Barnes & Noble.
2)Purpose . This bill clarifies that the sales and use tax
applies to Internet sales if the Internet retailer is
affiliated with a California retailer and sells the same or
similar products under the same or similar name, or the
facilities of the California retailer are used to advertise or
promote sales by the Internet retailer to California
consumers. The author is concerned that if special tax
privileges for e-commerce become entrenched in law and custom,
consumers will simply avoid paying the sales tax by executing
AB 81
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purchases online. The Legislative Analyst estimates that the
e-commerce tax subsidy currently results in state and local
revenue losses in the tens of millions of dollars annually.
But by 2003, this loss may grow to nearly one billion, with
increasing losses annually thereafter. The e-commerce tax
subsidy amounts to a public policy that places main street
retailers at a competitive disadvantage, erodes the sales tax
base of state and local government, and shifts the tax burden
toward lower-income citizens who cannot afford computers and
internet access.
3)Bill Does Not Conflict with Federal and State Internet Tax
Freedom Acts . This bill does not conflict with either the
federal or state Internet Tax Freedom Acts (IFTAs), neither of
which affects any existing taxes imposed in California,
including state and local sales and use taxes.
The federal IFTA, which expires in October, 2001, imposed a
three-year moratorium on new taxes on Internet access and on
multiple or discriminatory taxes on electronic commerce. The
state IFTA, which expires on January 1, 2002, imposed a
three-year moratorium on new or discriminatory taxes,
including taxes on Internet access or online computer services
and "bit" or bandwidth taxes. Neither prohibits the state or
local governments from collecting sales or use tax on Internet
purchases, provided the retailers from whom goods are
purchased over the Internet have sales and use tax nexus in
the state.
4)Prior Legislation . This bill is virtually identical to AB
2412 (Migden) of 2000, which was vetoed by the governor.
Analysis Prepared by : Stephen Shea / APPR. / (916) 319-2081