BILL ANALYSIS
SJR 1
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SENATE THIRD READING
SJR 1 (Ducheny)
As Amended July 15, 2009
Majority vote
SENATE VOTE :22-16
REVENUE & TAXATION 6-3
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|Ayes:|Charles Calderon, Beall, | | |
| |Coto, Ma, Portantino, | | |
| |Saldana | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|DeVore, Harkey, Hagman | | |
| | | | |
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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;
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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
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 exempt small businesses that sell products over
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.
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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.
FISCAL EFFECT : None
COMMENTS : 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."
Background. California enacted its first retail sales tax in
1933. The sales tax is imposed on retailers for the privilege
of selling tangible personal property (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 the Board of Equalization (BOE).
Both sales tax and use tax require that the "retailer be engaged
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in business in this state".
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 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.
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.
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.
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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
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". (Revenue and Taxation Code (R&TC) Section 6203).
R&TC 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
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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.
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.
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
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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.
The SSTP. According to its executive summary, the SSTP is an
effort created by state governments, with input from local
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.
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 pending in the Senate.
AB 469 (Eng), introduced in the current legislative session,
would require taxpayers, who have failed to report and pay the
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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 pending in the
Senate.
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:
"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."
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001915