BILL ANALYSIS
SJR 1
Page 1
Date of Hearing: July 6, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
SJR 1 (Ducheny) - As Amended: June 24, 2009
Majority vote.
SENATE VOTE : 22-16
SUBJECT : Sales and use tax: collection of use tax on
electronic sales: tax fairness and simplification.
SUMMARY : Urges members of the California congressional
delegation to join in support of legislative action by the
United States (U.S.) Congress to allow states to collect use
taxes on remote sales, provided that an exception from this
requirement is made for small businesses. Specifically, this
bill :
1)Makes all of the following legislative findings and
declarations:
a) U.S. Supreme Court, in deciding National Bella Hess v.
Department of Revenue (1967) 386 U.S. 753), and Quill Corp.
v. North Dakota (1992) 504 U.S. 298, held that, under the
U.S. Commerce Clause, states do not have authority to
require the collection of use taxes by out-of-state sellers
with no physical presence in the taxing state;
b) The failure to collect use taxes on remote sales through
traditional carriers and the erosion of sales and use tax
(SUT) due to electronic commerce threatens the future
viability of the SUT as a stable revenue source for state
and local governments;
c) States and localities are not collecting all of the
revenue due from electronic commerce;
d) Since 1999, state legislators, governors, local elected
officials, state tax administrators, and representatives of
the private sector have worked to develop a streamlined SUT
system for the 21st century. Between 2001 and 2002, 40
states enacted legislation expressing the intent to
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simplify the states' SUT collection systems, and to
participate in discussions to allow for the collection of
states' SUT;
e) The actions of the states provide justification for
Congress to enact legislation to allow states to require
remote sellers to collect the states' use tax;
f) The California State Legislature and other states have
shown the resolve to acknowledge the complexities of the
current SUT system, have worked with the business community
to formulate alternative collection systems, and have shown
the political will to enact the necessary changes to make
the collection systems the law;
g) Until Congress and the U. S. President enact legislation
allowing states to require remote sellers to collect the
states' use tax, states are unlikely to close the revenue
gap between what is owed on remote transactions and what is
collected; and,
h) When considering this legislation, Congress should
ensure that any federal legislation enabling use tax
collection on remote sales does not adversely affect
California small businesses that sell remotely and should
adopt a meaningful small business exception from the
legislation.
2)Calls upon the members of the California Congressional
delegation to join in support of legislative action by the
U.S. Congress to allow states to collect use tax on remote
sales and to protect small businesses that use the Internet.
3)Urges the President to sign into law legislation allowing for
the collection of use taxes on remote sales and to provide an
exception from that collection obligation for small
businesses.
4)Requires the Secretary of the Senate to transmit copies of
this resolution to the President and Vice President of the
U.S., to the President pro Tempore of the U.S. Senate, to the
Speaker of the House of Representatives, to each Senator and
Representative from California in the U.S. Congress, and to
the author for appropriate distribution.
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EXISTING FEDERAL LAW :
States that the Commerce Clause of the U.S. Constitution (Clause
3, Sec. 8, Art. I) precludes a state from requiring an
out-of-state seller to collect and remit the use tax of that
state unless both of the following apply: a) the tax is applied
to an activity with a substantial nexus with the taxing state,
and, b) the tax is fairly related to the services provided by
the state. (Quill).
EXISTING STATE LAW :
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the gross receipts from the sale of TPP
in this state. [Revenue & Taxation Code (R&TC) Chapter 2
(commencing with Section 6051) of Part 1 of Division 2].
2)Imposes a use tax on the storage, use, or other consumption in
California of TPP purchased from any retailer, absent a
specific exemption. [R&TC Chapter 3 (commencing with Section
6201) of Part 1 of Division 2].
3)Provides that the use tax is imposed on the purchaser, and
unless that purchaser pays the use tax to a retailer
registered with the Board of Equalization (BOE) to collect the
California use tax, the purchaser is liable for the tax,
absent a specific exemption.
4)Sets the same rate for the use tax as it does for the sales
tax.
5)Specifies that a purchaser must remit the use tax to BOE on or
before the last day of the month following the quarterly
period in which the purchase was made, or on the purchaser's
state income tax return filed with the Franchise Tax Board.
6)Provides that sales to Californian residents through
telephone, internet and mail order from out-of-state retailers
with no nexus in the state are not subject to SUT collection
by the retailer. If a retailer has sufficient "business
presence", as defined, that retailer is required to register
with the BOE and collect the applicable use tax on all sales
to California consumers.
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FISCAL EFFECT : None.
COMMENTS :
1)The author states that, "Generally, state sales tax systems
have not been updated to keep pace with changes in the modern
economy. Designed in the 1930s, sales tax bases were limited
to personal property. Today, economies are increasingly
dominated by untaxed services which are in many cases not
subject to sales tax. The growth of remote commerce (via
catalog, telephone and the Internet) has created numerous
opportunities to avoid paying or collecting tax. With the
purpose of modernizing sales tax systems and in response to a
U.S. Supreme Court decision that bars individual states from
requiring remote retailers to collect state sales taxes, we
hope to encourage Congress to allow states to simplify and
improve sales tax administration."
2)Background . California enacted its first retail sales tax in
1933. The sales tax is imposed on retailers for the privilege
of selling TPP at retail stores in this state and is measured
by the gross receipts of retailers derived from those sales.
In 1935, California adopted a use tax to alleviate the
competitive disadvantage experienced by in-state retailers.
The use tax is imposed on the purchaser, and unless that
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser is liable for the tax,
unless the use of that property is specifically exempted or
excluded from tax. The intent behind the enactment of the use
tax was to offset the incentive to purchase from retailers in
other states with low sales tax rates or no sales tax. The
use tax is virtually identical to the sales tax, except it is
imposed on the storage, use or consumption of the goods. It
is imposed on the purchases at the same rate as the sales tax,
including any applicable local sales taxes. Generally, an
individual or company is obliged to pay the use tax when they
purchase TPP from an out-of-state retailer that is not
registered with BOE. Both sales tax and use tax require that
the "retailer be engaged in business in this state".
3)Low Collection Rate . Even though the use tax has been in
effect since the 1930s, it is relatively unknown to California
consumers and BOE has not been very successful in collecting
the use tax. Apparently, many consumers that use mail-order
or the internet to purchase TPP are unaware of their
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responsibility to report and remit use tax. Unreported use
tax is the largest area of noncompliance - an estimated annual
$1.2 billion is attributable to unreported California use tax
by both businesses and individual consumers.
4)Competitive Advantage for Out-of-State Retailers . Another
reason for the use tax remittance noncompliance is the growing
number of out-of-state internet and mail-order vendors who are
not required to collect use tax for the State of California.
In-state retailers, however, must collect and remit sales tax
to BOE. States have been unable to impose a similar
compliance and collection requirement on out-of-state
retailers, largely, because of the "physical presence"
requirement. Consequently, California must rely on purchasers
of TPP to report their use tax obligations on their
out-of-state purchasers, such as those made over the internet
or through mail order. The fact that out-of-state retailers
can provide almost an instant 10% discount by virtue of not
collecting the use tax, coupled with the misconception that
reporting use tax is optional for the purchaser, gives
out-of-state vendors a competitive advantage. A consumer who
believes that a use tax is voluntary, as opposed to a
mandatory sales tax, will most likely make a purchase with a
vendor who does not have the mandatory sales tax.
5)Payment of Use Tax . The purchaser is required to remit the
use tax on or before the last day of the month following the
quarterly period in which the purchase was made. Failure to
pay the tax results in a 10% penalty plus interest.
Alternatively, taxpayers may elect to report their use tax on
their personal income or corporate tax returns. Should a
purchaser opt for this alternative, the use tax is considered
timely reported and remitted. For the 2008 taxable year, FTB
processed over 18.5 million returns. FTB tax forms have
comprehensive instructions with respect to computing and
reporting the use tax liability on income tax returns.
However, only a little over 44,000 state income tax returns
had use tax reported, yielding only $9 million in state and
local tax revenues.
1)What kind of out-of-state retailers are required to collect
the use tax ? Under existing law, there is 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. However, it is undisputed that that
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out-of-state retailers must have substantial nexus in
California before the state may impose a use tax collection
obligation on them. In Quill, 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. 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 constitutionally prohibited from requiring the retailer to
collect the tax. If the purchaser fails to remit the tax, the
purchase completely escapes taxation.
As discussed, California does impose a use collection obligation
requirement on "retailers engaged in business in this state
and making sales of TPP for storage, use, or other consumption
in this state". (R&TC Section 6203). Section 6203(c)
specifies which retailers are considered to be engaged in
business in this state - in other words, it lists those
retailers that are deemed to have a "physical presence"
sufficient to impose a use tax collection obligation. In
Current, Inc. v. State Board of Equalization (1994) 24
Cal.App.4th 382, the court held that R&TC Section 6203,
subdivision (g), as it appeared then, was unconstitutional as
it applied to Current, stating that it placed an impermissible
burden on interstate commerce. At that time, subdivision (g)
defined a "retailer engaged in business in this state" as "any
retailer owned or controlled by the same interests which own
or control any retailer engaged in business in the same or a
similar line of business in this state". The most significant
aspect of Current was that it sets forth those factors that
would be utilized by a court to determine whether one retailer
is an agent of another. The factors set forth in Current to
determine an agency relationship are: two entities hold
themselves as being identical or affiliated; share goodwill,
trade names, or marketing practices; or exploit the trade
name, corporate identification, or goodwill of the other.
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In Borders Online, LLC v. State Board of Equalization (2005)
129 Cal. App.4th 1179, 1198, the Court of Appeal noted that
the realities of 21st Century marketing and technology
increasingly afford opportunities for out-of-state vendors to
establish a strong economic presence in the state utilizing
the state's legal-economic environment while maintaining only
a minimal or vicarious presence in the state. The Court of
Appeals affirmed the judgment of the trial court, holding
that, by accepting the Internet vendor's merchandise under the
terms of the vendor's return policy, the affiliated chain
acted as the vendor's agent or representative within the
meaning of R&TC Section 6203(c)(2). Thus, the court found
that the vendor in Borders had a sufficient physical presence
in California through the affiliated chain to satisfy the
substantial nexus standard of the Commerce Clause, which did
not require that the vendor take part in the solicitation of
sales or in sales transactions within the state. However,
many out-of-state retailers do not have affiliates or agents
that would create a substantial nexus for those retailers in
California. Given the complexity of the states' sales taxes,
congressional action is necessary to address the Commerce
Clause issues.
1)Exception for small businesses. This bill also urges Congress
to protect remote out-of-state sellers from the use tax
collection obligation if they are small businesses. The
author states that, if remote sellers are required to collect
states' use taxes, they would have to collect and remit taxes
to approximately 7,500 different taxing jurisdictions. Many
small businesses will not be able to comply with this
collection burden and will go out of business. A study
commissioned by the Streamlined Sales Tax Project (SSTP)
Governing Board found that for small sellers ($150,000 to $1
million in annual sales), the cost of collection is nearly 17%
on every dollar of tax collected, excluding any initial costs
of programming, systems integration, and employee training.
If this exception is implemented by Congress, consumers would
still need to self-assess and remit use tax on purchases from
these small, exempt businesses. In addition, when
Californians purchase taxable items from foreign businesses,
they would still be required to self assess use tax because
the foreign seller would not be subject to collection.
2)The SSTP . According to its executive summary, the SSTP is an
effort created by state governments, with input from local
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governments and the private sector, to simplify and modernize
SUT collection and administration. The goal of the project is
to develop measures to design, test and implement a SUT system
that radically simplifies SUT. SSTP was organized in March
2000 and conducts its work through a steering committee made
up of co-chairs, four work groups, and a number of sub-groups.
The participants are mainly state revenue departments, but
also include state legislators, local governments and
businesses. There are three levels of SSTP participation:
public participation, observer, and voting participant.
California attained observer status in March 2003 due to a
vote of the BOE. Legislation to attain voting status [(SB 157
(Bowen), Chapter 702, Statutes of 2003] was signed by Governor
Davis in October 2003. The legislation established the Board
of Governance to represent the State of California in
negotiations with other states on all matters relating to the
adoption of, or amendments to, the Streamlined Sales and Use
Tax Agreement.
Between 2001 and 2005, 42 states enacted legislation expressing
the intent to simplify the states' SUT collection systems, and
to participate in discussions to allow for the collection of
states' sales and use taxes. By January 1, 2008, Arkansas,
Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota,
Nebraska, Nevada, New Jersey, North Carolina, North Dakota,
Ohio, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont,
Washington, West Virginia, and Wyoming, representing over 35%
of the total population of the U.S., have enacted legislation
to provide a state statutory basis to require remote sellers
to collect the states' use tax.
3)Recommended Amendments . Committee staff recommends the
following technical amendments.
AMENDMENT 1
On page 3, strike out line 16, and insert:
to exempt from the use tax collection requirement small
businesses that sell products over the Internet; and be it
further
AMENDMENT 2
On page 3, strike out lines 19 and 20, and insert:
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of use taxes on remote sales and to exempt from the use tax
collection requirement small businesses that sell products
over the Internet, upon its passage by the Congress;
4)Related Legislation .
AB 711 (Calderon), introduced in the current legislative
session, would require a qualified purchaser, as defined, to
register with the BOE to report and pay, by April 15, the use
tax owed for the previous calendar year. AB 711 is set for
hearing in the Senate Revenue and Taxation Committee on July
8, 2009.
AB 469 (Eng), introduced in the current legislative session,
would require taxpayers, who have failed to report and pay
the use tax to BOE, to report and pay qualified use tax on an
income tax return for the taxable year in which the liability
for the use tax was incurred, as specified. AB 469 is set
for hearing in the Senate Revenue and Taxation Committee on
July 8, 2009.
AB 969 (Eng), introduced in the 2007-08 Legislative Session,
would have required, rather than authorized, taxpayers to
report and pay use tax obligations on income tax returns if
they failed to report and remit use tax obligations directly
to BOE. AB 969 was vetoed by the Governor. As stated in the
veto message:
"I am returning Assembly Bill 969 without my
signature.
"Although increasing use tax reporting is
desirable, I have concerns
that the effective date of January 1, 2008 is too
soon for taxpayers
to compile adequate records of their purchases that
are subject to
the use tax for calendar year 2007. Further, I
would like to see a
plan to better educate taxpayers on the use tax, as
I suspect that
many taxpayers have little knowledge of the tax and
may unknowingly
fail to pay it."
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REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098