BILL ANALYSIS
AB 178
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Date of Hearing: April 27, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 178 (Skinner) - As Introduced: February 2, 2009
Majority vote. Fiscal committee.
SUBJECT : Sales and use taxes: retailer engaged in business in
this state
SUMMARY : Expands the statutory list of retailers that are
considered to be engaged in business in California and that, as
such, are required to collect use tax on sales of tangible
personal property (TPP) to California consumers. Specifically,
this bill :
1)Provides that the term "retailer engaged in business in this
state" includes any retailer with an agreement with a
California resident under which the resident, for a commission
or other consideration, directly or indirectly refers
potential customers of TPP, whether by a link or an Internet
website or otherwise, to the retailer, if the cumulative gross
receipts or sales price from sales by the retailer to
customers in California who are referred pursuant to these
agreements exceeds $10,000 during the preceding four calendar
quarterly periods.
2)Specifies that this provision shall not apply if the retailer
can demonstrate that the resident with whom the retailer has
an agreement did not engage in referrals in the state on
behalf of the retailer that would satisfy the requirements of
the commerce clause of the United States (U.S.) Constitution
during the four quarterly periods in question.
EXISTING FEDERAL LAW :
1)Authorizes Congress, under the commerce clause of the U.S.
Constitution, to regulate commerce with foreign nations, and
among the several states. The U.S. Supreme Court has held
that the "negative" or "dormant" commerce clause also
prohibits states from enacting laws that unduly burden
interstate commerce.
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2)Provides per federal case law that, under the commerce clause,
a retailer must have a "physical presence" in a state before
that state can require the retailer to collect its use tax.
EXISTING STATE LAW :
1)Imposes a use tax on the storage, use, or other consumption in
this state of TPP purchased from any retailer. The use tax is
imposed on the purchaser, and unless the purchaser pays the
use tax to a retailer registered to collect the California use
tax, the purchaser remains liable for the tax, unless the use
is exempted. The use tax is set at the same rate as the
state's sales tax and must be remitted to the Board of
Equalization (BOE).
2)Specifies those retailers that are considered to be engaged in
business in this state and that, as such, are required to
collect use tax on sales of TPP to California consumers.
Specifically, a "retailer engaged in business in this state"
includes a retailer who:
a) Maintains, occupies, or uses, permanently or
temporarily, directly or indirectly, or through a
subsidiary, or agent, by whatever name called, an office,
place of distribution, sales or sample room or place,
warehouse or storage place, or other place of business;
b) Has any representative, agent, salesperson, canvasser,
independent contractor, or solicitor operating in this
state under the authority of the retailer or its subsidiary
for the purpose of selling, delivering, installing,
assembling, or the taking of orders for any TPP; or,
c) Derives rentals from a lease of TPP situated in this
state.
FISCAL EFFECT : BOE estimates that this bill would generate
$149.5 million annually in state, local, and special district
revenues.
COMMENTS :
1)The author states:
California currently requires all of its businesses to
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collect and remit sales tax to the state. However,
out-of-state internet retailers who have millions of
dollars in sales generated from California residents are
not required to collect sales tax on transactions. The
current tax collection structure actually encourages
companies with internet sales to move out-of-state so that
they can get around our sales tax laws. This current
loophole in law places California businesses at an unfair
disadvantage while out-of-state businesses reap the
benefits of our large consumer base, and simultaneously put
brick and mortar stores out of business.
Given our budget shortfall, California needs to be
proactive in collecting taxes which are due and payable.
New York State enacted a bill comparable to AB 178 and as a
result New York has collected over $40 million dollars in
tax revenue to date and expects to collect approximately
$70 million by the end of the year. The Board of
Equalization estimates that California would collect over
$150 million if AB 178 were enacted.
California's businesses are suffering a huge competitive
disadvantage due to these online retailers. By not
collecting sales taxes, out-of-state retailers
automatically enjoy at least an 8.25% price advantage when
competing for customers. In some cities, out-of-state
retailers will have a 10.25% price advantage over
California businesses. The loss of sales tax revenue to
the state means that local communities who depend on this
revenue source also suffer. These are funds that go back
to communities, money that will strengthen our schools and
enhance public safety.
2)Proponents state:
This important bill helps clarify that out-of-state
retailers with affiliates in the state of California in
fact have nexus in California, and therefore must collect
use tax. Amazon.com has hundreds, if not thousands, of
affiliates in California who receive a commission on sales
which they refer to Amazon. By any definition of nexus,
they have many agents or representatives in the state, and
must collect taxes upon sale. Right now, they are
competing unfairly with thousands of California businesses.
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The language in this bill is patterned directly after New
York [S]tate's language, which was determined by the first
court of review to be legal, based upon a long line of
cases which determine the basis for nexus. Amazon has
appealed, but in the original court's review, all of their
claims were dismissed on the law and facts, so it is likely
that this issue will be resolved in the state's favor in an
expeditious manner. (The U.S. Supreme Court has
consistently declined to hear nexus cases, deferring to
Congress). Significantly, Amazon began collecting use tax
immediately for orders from New York residents, and, since
this tax is due and payable in any case, the only possible
adverse outcome for the state in the unlikely event that
the state loses would be that Amazon would be relieved of
its collection obligation in the future.
Thus, California must be in a position to follow this lead,
and join other states (Minnesota, Connecticut) which are
considering the same approach. California took the lead
successfully in determining that companies with stores in
California could not isolate their on-line retailers from
collection obligations, even if out-of-state, and the
national practice now is that all retailers collect from
their ".com" affiliates. In California, the many
affiliates of Amazon and other retailers promote products
and receive commissions upon sale, thereby meeting the
statutory and judicial requirements for nexus.
3)Opponents state:
This bill would strongly discourage non-California
retailers from advertising on California-based websites via
click-thrus. These click-thrus (the ability to "click
thru" to the out-of-state retailer's website through a
banner ad or other link) are a large source of revenue for
California-based companies, clubs, community organizations,
and other website operators. If this bill were to create
nexus for non-California retailers using click-thrus, many
California-based organizations would lose this source of
revenue. By contrast, non-California website companies and
organizations would still receive revenue for click-thru
ads because retailers could still use these websites to
access the California market without subjecting themselves
to sales tax. This disparity between California-based
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websites and non-California-based websites would place
California-based-websites at a competitive disadvantage.
In addition to the loss of click-thru advertising revenue,
AB 178 would place California companies that provide an
online marketplace for buyers and sellers of tangible goods
at a competitive disadvantage compared to non-California
companies providing the same service. The bill extends
state sales tax to out-of-state retailers that receive an
indirect customer referral from a California-based company.
This provision adversely impacts California companies that
bring buyers together with out-of-state sellers. If the
use of a California-based online marketplace will impose a
duty to collect sales tax on out-of-state retailers,
California-based online marketplaces stand to lose business
to their counterparts in other states. As with click-thru
advertising, the out-of-state retailer can access the
California market just as readily from a Texas-based online
marketplace as it can from a California-based counterpart.
4)BOE notes that:
The state of New York, as part of its budget, enacted
legislation in 2008 entitled "the Commission-Agreement
Provision" that presumes a retailer "solicits" business in
the state if an in-state entity is compensated for directly
or indirectly referring customers to the retailer -
language that is substantially similar to this measure.
Last April, Amazon sued New York's taxation department.
Then, in May, Overstock suspended its relationships with
any affiliates that had a New York address. And in June,
the company joined Amazon in its suit, challenging the
constitutionality of the tax law.
Both Amazon and Overstock contended that the law violates
the Commerce Clause of the U.S. Constitution and the Due
Process Clause of the Fourteenth Amendment to the
Constitution and sought a permanent injunction prohibiting
New York from enforcing the law.
Seattle-based Amazon argued that it did not have a
sufficient nexus (physical presence) in the state to be
compelled to collect use tax and basically contended that
the new law intentionally targets Amazon. Additionally,
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Amazon said the law is vague and overly broad because
Amazon has no way of knowing whether its affiliates, who
provide addresses in other states, are legal residents of
New York.
The New York Supreme Court [New York's trial court]
dismissed both the Amazon and Overstock suits, ruling that
the Commission-Agreement Provision does not broadly tax any
and all Internet sales to New York consumers in that it
requires a substantial nexus between an out-of-state seller
and New York through a contract to pay commissions for
referrals with a New York resident along with realization
of more than $10,000 of revenue from New York sales earned
through the arrangement. Further, the Court stated that
the neutral statute simply obligates out-of-state sellers
to shoulder their fair share of the tax collection burden
when using New Yorkers to earn profit from other New
Yorkers.
5)Committee Staff Notes:
a) What is "physical presence" and why is it important? :
i) There is, under existing law, a certain degree of
ambiguity concerning when a state may legally compel an
out-of-state retailer to collect the state's use tax on
sales to state residents.
ii) In Quill Corp. v. North Dakota (1992), 504 U.S. 298,
the U.S. Supreme Court was asked to decide the
constitutionality of a North Dakota law that imposed a
use tax collection obligation on out-of-state retailers
that advertised in the state three or more times in a
single year. The Court invalidated the law, holding
that, under the commerce clause, a retailer must have a
"physical presence" in a state before that state can
require the retailer to collect its use tax.
iii) The "physical presence" test affirmed in Quill has
complicated California's efforts to collect its use tax.
For example, when a California resident purchases a coat
from an out-of-state retailer through its catalog, the
purchaser's use of the coat in California triggers a use
tax liability. If the out-of-state retailer lacks a
"physical presence" in California, however, California is
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constitutionally prohibited from requiring the retailer
to collect the tax. If the purchaser fails to remit the
tax, the purchase completely escapes taxation. It is
estimated that this gap in California's sales and use tax
system costs the state nearly $1.1 billion in revenues
each year.
iv) Revenue and Taxation Code Section 6203 specifies
those retailers considered to be engaged in business in
this state - in other words, it lists those retailers
that are considered to have a "physical presence"
sufficient to impose a use tax collection obligation.
This bill would add to that list any retailer that has an
agreement with a California resident, under which the
resident, for a commission or other consideration,
directly or indirectly refers potential customers to the
retailer, if the cumulative gross receipts from sales by
the retailer to customers in California who are referred
exceeds $10,000 during the preceding four calendar
quarterly periods. As noted above, this language is
modeled after legislation passed in New York State last
year. Committee staff is informed that there are other
states currently considering following suit.
v) Committee staff is informed that many "out-of-state"
retailers currently use California residents, often
referred to as "affiliates", to promote business.
Sometimes, affiliate agreements are entered into directly
between the out-of-state retailer and California
residents. In other situations, they are mediated by an
"affiliate network". It is Committee staff's
understanding that affiliates engage in a wide range of
activities. Some maintain websites that contain links to
out-of-state retailers. Others engage in more active
e-mail solicitation. Under this bill, any business that
uses affiliates to generate substantial sales to
California residents would be deemed to have a physical
presence in this state.
b) The arguments on both sides :
i) Opponents state that, if this bill passes, it will
cause out-of-state retailers to terminate their affiliate
relationships with California residents. This, they
argue, will place the jobs of California affiliates at
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risk in an already troubled economic climate.
ii) Proponents of this measure note that many
out-of-state retailers use California residents to drive
business, take full advantage of California's consumer
base, but refuse to collect California's use tax. This,
in turn, places these companies at a competitive
advantage vis-?-vis California-based businesses, which
must collect and remit sales tax. Proponents essentially
argue that, under existing law, the affiliate system
works to reward companies whose business model is
predicated on the fact that most consumers unlawfully
fail to pay use tax.
c) Who exactly would be considered an affiliate under this
measure? : In its current form, this bill covers referral
agreements under which the California resident receives a
commission "or other consideration". This, in turn, has
raised concerns that this bill might inadvertently include
"cost-per-click" web advertising agreements. Committee
staff understands that the author is working on amendments
to address this concern.
d) Related Legislation : ABx3 27 (Calderon) contains a
provision similar to this bill, and also contains a
provision that would further expand the definition of a
"retailer engaged in business in this state" to include any
retailer having a representative, agent, salesperson,
canvasser, independent contractor, or solicitor operating
in this state under the authority of the retailer or its
subsidiary for the purpose of servicing or repairing any
property.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
Books 'n Bears
Builders Booksource
California Association of College Stores
California Business Properties Association
California Federation of Teachers
California Labor Federation
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California Professional Firefighters
California School Employees Association, AFL-CIO
California Tax Reform Association
EcoHome Improvement
Kepler's Books & Magazines
League of California Cities
Mrs. Nelson's Toy and Book Shop
Netflix
Potter Books
River House Books
River Reader
Sawyer's News
Service Employees International Union
Walnut Avenue Caf?
1 Individual
Opposition
Advice Company
Amazon.com
AOL
Billy Fire LLC
Blinkstar Media
California Broadcasters Association
California Chamber of Commerce
California Independent Grocers Association
California Manufacturers and Technology Association
California Taxpayers' Association
Coastal Cardiology
Commission Junction, Inc.
Creativity, Inc.
Direct Marketing Association
DMAF Consulting
eBay, Inc.
Entertainment Software Association
Fuller Sound/CSS Music/D.A.W.N.
Google
Greater San Fernando Valley Chamber of Commerce
Haldeman, Inc.
Howard Jarvis Taxpayers Association
HR Jungle
Hydra
Internet Alliance
Irvine Chamber of Commerce
Manheim Central California
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Motion Picture Association of America, Inc.
Murphy, McKay & Associates, Inc.
Ogletree's, Inc.
Overstock.com
Palm Desert Chamber of Commerce
Panoptx Inc.
Performance Marketing Alliance, Inc. on behalf of over 300
California Professionals
Plan-it Interactive
Recording Industry Association of America
Risse Mechanical
Schaaf Consulting
Seawright Custom Precast, Inc.
Silicon Valley Leadership Group
Software Finance and Tax Executive Council
St. John's Retirement Village
Stephen P. McGee, Law Offices
TechAmerica
TechNet
The Press-Enterprise
ValueClick, Inc.
VLSI Research, Inc.
Westgate Hardwoods, Inc.
Yahoo, Inc.
1 Individual
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098