BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 28 X1
                                                                  Page  1

          CONCURRENCE IN SENATE AMENDMENTS
          AB 28 X1 (Blumenfield)
          As Amended  June 14, 2011
          Majority vote.  Budget Bill Appropriation Takes Effect 
          Immediately
           
           ----------------------------------------------------------------- 
          |ASSEMBLY:  |     |(June 3, 2011)  |SENATE: |24-15|(June 15,      |
          |           |     |                |        |     |2011)          |
           ----------------------------------------------------------------- 
                    (vote not relevant)

           SENATE VOTE  :Vote not relevant  
           
           SUMMARY  :  Makes various changes to state laws to implement 
          compliance-related mechanisms relating to existing taxes by 
          expanding the statutory list of retailers that are considered to 
          be engaged in business in California and required to collect use 
          tax on sales of tangible personal property to California 
          consumers.  

          The Senate amendments  delete the Assembly version of this bill, 
          and instead:
           
           1)Establish that any retailer with substantial nexus in this 
            state for purposes of the commerce clause of the U.S. 
            Constitution and any retailer, upon whom federal law permits 
            the state to impose a use tax collection duty, is required to 
            collect the use tax on behalf of the state.

          2)Require use tax collection and remittance by a retailer that 
            is a member of a combined reporting group for income tax 
            purposes, when another member of the same group provides 
            services in connection with the sale of tangible personal 
            property in California, pursuant to an agreement with the 
            retailer.

          3)Impose a use tax collection obligation on any retailer that 
            enters into an agreement under which persons in this state 
            refer potential customers to the retailer for a commission, 
            whether by an Internet-based link, a Web site, or otherwise, 
            provided that the:

             a)   Cumulative sales price from all of the retailer's sales 
               within the preceding 12 months to customers in California 








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               that are referred pursuant to those agreements is in excess 
               of $10,000; and,

             b)   Cumulative sales price from all of the retailer's sales 
               within the preceding 12 months to customers in California 
               exceeds $500,000.

               i)     Specifies that this provision shall not apply if the 
                 retailer can demonstrate that the person with whom the 
                 retailer has an agreement did not engage in referrals in 
                 the state on the retailer's behalf that would satisfy the 
                 requirements of the commerce clause of the U.S. 
                 Constitution.

            ii)    Provides that an agreement described above shall not 
                 include any agreement under which a retailer:

                  (1)       Purchases advertisements from a person in this 
                    state, to be delivered on television, radio, in print, 
                    on the Internet, or by any other medium, unless the 
                    advertisement revenue paid consists of commissions or 
                    other consideration that is based upon sales of 
                    tangible personal property; or,

                  (2)       Engages a person in this state to place an 
                    advertisement on a Web site operated by that person, 
                    or operated by another person in this state, unless 
                    the person entering the agreement with the retailer 
                    also directly or indirectly solicits potential 
                    customers in this state, through the use of flyers, 
                    newsletters, telephone calls, electronic mail, blogs, 
                    micro blogs, social networking sites or other means of 
                    direct and indirect solicitation specifically targeted 
                    at potential customers in this state.

          i)   Provides that for these purposes, retailer includes an 
               entity affiliated with a retailer within the meaning of 
               section 1504 of the Internal Revenue Code.

          1)Add an appropriation allowing this bill to take effect 
            immediately upon enactment.

           AS PASSED BY THE ASSEMBLY  , this bill expresses the intent of the 
          Legislature to enact statutory changes relating to the 2011 
          Budget Act.








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           FISCAL EFFECT  : The estimated revenue impact of the measure is 
          expected to be $195 million General Fund and $122 million 
          special and local funds.

           COMMENTS  :  California imposes a sales tax on retailers for the 
          privilege of selling tangible personal property, absent a 
          specific exemption.  The tax is based upon the retailer's gross 
          receipts from sales in this state.  The state also imposes a 
          complementary use tax on the storage, use, or other consumption 
          in this state of tangible personal property 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 
          State Board of Equalization.  Retailers that are considered to 
          be engaged in business in this state are required to collect use 
          tax on sales of tangible personal property to California 
          consumers. 

          Existing federal law authorizes Congress, under the Commerce 
          Clause of the U.S. Constitution, to regulate commerce with 
          foreign nations, and among the states.  The U.S. Supreme Court 
          has held that the "negative" or "dormant" Commerce Clause also 
          prohibits states from enacting laws that unduly burden or 
          discriminate against interstate commerce.  Federal law also 
          provides based on case law that, under the dormant Commerce 
          Clause, a retailer must have a "physical presence" in a state 
          before that state can require the retailer to collect its use 
          tax.  There is substantial controversy and ambiguity regarding 
          the extent to which states can impose the use tax collection 
          obligation on out-of-state retailers, despite numerous state and 
          federal court decisions.

          This bill combines three different approach regarding 
          establishing use tax collection obligations on out-of-state 
          retailers. The approaches include the New York Style or Amazon 
          Approach, the Reporting Group Method, and Long-Arm Nexus.

          1)New York Style or Amazon approach imposes a use tax collection 
            obligation based on affiliation with individuals and 
            businesses in California that refer customers to out-of-state 
            retailers for purposes of selling tangible personal property.  
            This approach is the basis of AB 153 (Skinner).








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          2)Reporting Group approach is based on the activities of 
            in-state related companies and whether these companies engaged 
            in activities connected to the sales of tangible personal 
            property by the retailer.  This approach is the basis of AB 
            155 (Calderon).

          3)Long-Arm Nexus imposes a use tax collection whenever warranted 
            under the U.S Constitution or federal law.  With this method, 
            a bright line test is not used but rather the collection 
            obligation is imposed based on facts and circumstances 
            involving the firm and applicable case law.  This approach is 
            the basis of SB 234 (Hancock).


           Analysis Prepared by  :    Mark Ibele / BUDGET / (916) 319-2099
           
           
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