BILL ANALYSIS Ó
AB 153
Page A
Date of Hearing: March 7, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 153 (Skinner) - As Introduced: January 18, 2011
Majority vote. Fiscal committee.
SUBJECT : State Board of Equalization: administration:
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)Imposes a use tax collection obligation on any retailer that
enters into an agreement under which one or more persons in
this state, for a commission or other consideration, directly
or indirectly refer potential customers to the retailer,
whether by an Internet-based link, a website, or otherwise,
provided the cumulative sales price from all of the retailer's
sales within the preceding 12 months to customers in
California who are referred exceeds $10,000.
2)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 United States (U.S.) Constitution.
3)Provides that an agreement under which a retailer purchases
advertisements from a person in this state, to be delivered on
television, radio, in print, on the Internet, or by any other
medium, is not an agreement described above, unless the
advertisement revenue paid consists of commissions or other
consideration that is based upon sales of TPP.
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
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prohibits states from enacting laws that unduly burden or
discriminate against interstate commerce.
2)Provides per federal 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.
EXISTING STATE LAW :
1)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
2)Imposes a complementary 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
State Board of Equalization (BOE).
3)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, the term "retailer engaged in business in this
state" includes any 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 : The BOE notes that its revenue estimate for this
bill is subject to "considerable uncertainty." Moreover, there
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could be a delay in collections due to potential litigation
challenging this measure. In a purely static world with full
retailer compliance, BOE estimates increased state and local
revenues of $152 million in fiscal year (FY) 2011-12 and $317
million in FY 2012-13. These estimates are based on the
combination of (1) the amount of revenues currently being
collected in New York, adjusted for California's larger economy,
and (2) increased revenues associated with out-of-state
retailers that sell to California consumers on eBay that would
have a use tax collection obligation under this bill.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
AB 153 would clarify state laws to require internet based
non-California merchants with a network in the state to
collect sales tax on purchases shipped into California.
This bill would play a significant role in leveling the
playing field for California businesses and would help
secure needed revenue to support essential local services.
AB 153 will provide a much needed boost to hundreds of
brick and mortar businesses in the state. For several
years, local businesses have been calling for an equitable
resolution to this issue. While they collect and pay the
sales taxes their communities rely on, out-of-state, online
retailers do not, and their avoidance has cost the state
billions of dollars a year. While these out-of-state
online retailers entice shoppers with so-called "tax-free
shopping," local retailers pay their fair share of taxes
and do hundreds of other things - some financial, some
non-financial - to support local activities.
California businesses are the backbone of our economy and
we cannot continue to put them at a disadvantage to mega
online retailers who use loopholes from our outdated laws
to reap the benefits of our large consumer base. It's
estimated that retail businesses physically based in the
state - and employing California workers - are losing $4.1
billion in sales in 2010 to online-only retailers. The
state needs to end this loophole and give all businesses
the chance to compete in California on an even playing
field.
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2)Proponents state, "For too many years, out-of-state retailers
have exploited the ability to avoid collecting sales tax even
when companies like Amazon have substantial presence in the
state of California. ƯAB 153] will be an unusual win-win:
good for revenue for the state and for the many businesses in
California which are at a disadvantage from this tax avoidance
strategy. The fact is, Amazon has thousands of affiliates and
direct properties in the state, and in our view should already
be collecting tax. ƯAB 153] will clarify that such a presence
establishes sales tax nexus, as is appropriate."
3)Opponents state, "If AB 153 were to pass and create nexus for
non-California retailers using click-throughs, a principal
source of revenue for California-based companies and
organizations would end as out-of-state retailers severed
their California ties. Non-California website companies and
organizations would become the ultimate beneficiaries of AB
153 because the out-of-state retailers would simply switch to
using their websites to access the California market and avoid
the state's use tax laws."
4)BOE has provided the following comments in its staff analysis
of this bill:
a) Is this form of affiliate nexus constitutional? :
"Nineteen years have passed since the court rendered its
decision in Quill. However, the manner in which business
is done now has changed dramatically compared with the
commercial landscape at the time that case was decided.
The New York Appellate court has determined that these
provisions are not unconstitutional on their face.
However, there is still some question with respect to New
York's provisions (after which this bill is modeled)
whether they are constitutional as they are applied. Until
the court ultimately decides that the physical presence
requirement affirmed in Quill is outdated, and renders a
new decision to reflect today's marketplace, there is at
least some question whether this form of affiliate nexus
will be ultimately found to be in conformance with the
dormant commerce clause."
b) In addition to firms like Amazon, provisions could
impact many other out-of-state retailers who sell tangible
items on eBay or other similar online marketplaces
domiciled in California . "As currently worded, the
provisions would apply to those out-of-state retailers that
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are not otherwise engaged in business in California but
that sell goods to California consumers through online
sites maintained by California residents when all of the
conditions in the bill are met. An out-of-state retailer's
sales through eBay, for example, where eBay refers
potential purchasers for a commission or other
consideration to the retailer by a link or otherwise, could
fit within the provisions of this bill (eBay is a
California "resident"). If those sales exceeded $10,000
within the previous 12 months, that out-of-state retailer
would be considered "engaged in business" in this state
under this bill. As a retailer engaged in business in
California, the retailer would be required to register with
the BOE and would have the duty to collect the use tax on
all of his or her sales to California consumers - whether
through eBay or otherwise."
c) Affiliates' concerns . "According to information
obtained from Performance Marketing Association, California
has about 25,000 affiliates who derive income from
agreements with out-of-state retailers that potentially
could be negatively impacted by this bill. Their concern
relates to the fact that many out-of-state retailers with
affiliate programs will terminate their agreements with
them should California enact this provision. Overstock.com
did, in fact, terminate its affiliate program in New York -
the first state that enacted this "click through nexus"
provision, and Amazon terminated its affiliate programs in
Rhode Island and North Carolina when those states enacted
provisions similar to this bill. Amazon even terminated
their relationship with Colorado's affiliates when the
Colorado Legislature enacted provisions to impose an
information reporting requirement on remote retailers that
do not have nexus in Colorado. And, a "click through
nexus" bill is currently awaiting the Governor's signature
in Illinois, and Amazon has informed its affiliates there
that Amazon's affiliate program with them will terminate
should the bill become law. And, more importantly, we have
also obtained written confirmation directly from Amazon
that confirms that it will terminate its relationship with
its California affiliates should California enact this
provision."
d) What are other states doing ? "In addition to pending
legislation in Illinois on this "click through nexus"
provision, several other states are considering adding a
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similar provision: Arizona, Hawaii, Minnesota,
Mississippi, New Mexico, Connecticut, Texas and Vermont.
Also, a bill to repeal its "click through nexus" provision
has been introduced in Rhode Island."
5)Committee Staff Comments:
a) California's Use Tax : Since 1933, the state has imposed
a sales tax on California retailers for the privilege of
selling TPP, absent a specific exemption. The tax is based
upon the retailer's gross receipts from TPP sales in this
state. In 1935, California adopted a complementary "use
tax" on the storage, use, or other consumption of TPP
purchased out-of-state and brought into California. The
use tax was designed to protect California merchants who
would otherwise be at a competitive disadvantage when
out-of-state retailers sell to 10,000 California customers
without charging tax.
Unlike the sales tax, the use tax is imposed on the
purchaser and not the retailer. Unless the purchaser pays
the use tax to an out-of-state retailer registered to
collect California's use tax, the purchaser remains liable
for the tax. The use tax is set at the same rate as the
state's sales tax and must be remitted to the BOE.
b) Impediments to Collection : The most practical way for a
state to enforce its use tax is to have retailers collect
the tax at the time of sale. However, there is
considerable ambiguity regarding the circumstances under
which a state may legally compel an out-of-state retailer
to collect use tax on its behalf. This ambiguity has its
origins in the Commerce Clause of the U.S. Constitution,
which charges Congress with regulating commerce among the
several states. The U.S. Supreme Court has held that, by
implication, the Commerce Clause also prohibits states from
enacting laws that unduly burden interstate commerce.
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 negative Commerce Clause, a retailer must have a
"physical presence" in a state before that state can
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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 consumer purchases a coat
from an out-of-state retailer through its catalog or online
store, the consumer'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 consumer fails to
remit the tax, the purchase completely escapes taxation.
It is estimated that this gap in California's sales and use
tax (SUT) system costs the state over $1.145 billion in
revenues each year.<1>
c) What Would this Bill Do? : As noted above, Revenue and
Taxation Code (R&TC) 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 this
statutory list certain "out-of-state" retailers that use
California residents, often referred to as "affiliates," to
promote business. This bill is modeled after the so-called
"Amazon" legislation passed in New York. New York, and
other states that have enacted similar bills, argue that if
a remote vendor (like Amazon) uses an affiliate marketing
program, the vendor's in-state activities satisfy Quill's
physical presence requirements and thus create SUT nexus
for the vendor. Specifically, this argument is based on
the theory of "attributional" nexus, as established in
Scripto, Inc. v. Carson (1960) 362 U.S. 207 and Tyler Pipe
Indus. v. Washington State Dep't of Revenue (1987) 483 U.S.
232, which hold that if a retailer has in-state agents that
sell on the retailer's behalf, the in-state agents may
establish nexus on behalf of the out-of-state retailer.
d) Arguments in Support : Proponents of the Amazon approach
note that many out-of-state retailers use California
residents to drive business, and take full advantage of
California's consumer base, but refuse to collect
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<1> This total represents $795 million in use taxes uncollected
from California consumers and $350 million in use taxes
uncollected from businesses.
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California's use tax. <2> This, in turn, places these
companies at a competitive advantage vis-à-vis
California-based businesses, which must collect and remit
sales tax.
e) Arguments in Opposition : Opponents of the Amazon
approach argue that such legislation would cause
out-of-state retailers to terminate their affiliate
relationships with California residents. This, they argue,
would place the jobs of California affiliates at risk in an
already troubled economic climate. In addition, critics
argue that affiliates operate far differently from the
sales force "actively engaged" on behalf of Scripto, Inc.
Specifically, they note that the work of most affiliates is
passive and that affiliates do not call on customers or
directly solicit orders.
f) What Type of Affiliate Behavior Creates Nexus under this
Bill? : As noted above, this bill imposes a use tax
collection obligation on any retailer that enters into an
agreement under which a California affiliate, for a
commission or other consideration, directly or indirectly
refers potential customers to the retailer, whether by an
Internet-based link, a website, or otherwise. This
language would seem to cover a broad range of potential
affiliate arrangements. On one end of the continuum, this
language would seem to cover rather passive
commission-based link referrals, where the affiliate does
no more than refer potential consumers via a link on their
Internet website. On the other end of the continuum, this
language would also cover affiliates who engage in active
solicitations (whether by e-mail or otherwise). It is
unclear whether a reviewing court would find all of these
affiliate activities sufficient to establish nexus for
remote vendors. Efforts could be taken to more
specifically describe the types of affiliate activities
that would establish nexus in California. However,
providing such statutory clarity might have the unintended
consequence of prompting remote vendors to simply
restructure their affiliate agreements to fall outside the
law's ambit. That is to say, out-of-state companies would
effectively be given a roadmap for restructuring their
affiliate agreements.
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<2> Amazon, Inc. collects tax in only five states: Washington,
North Dakota, Kentucky, Kansas, and New York. Indeed, it would
seem that tax avoidance has been a longstanding priority for
Amazon, Inc. founder Jeff Bezos, who originally considered
citing his company on an Indian reservation near San Francisco
for tax avoidance purposes. ("Sorry, Shoppers, but Why Can't
Amazon Collect More Tax?," Randall Stross, New York Times,
December 26, 2009).
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g) Would Remote Vendors Really Terminate their California
Affiliates? : It should be noted that out-of-state
retailers have followed through on their threats to
terminate affiliate contracts in states that have adopted
Amazon legislation. After New York's enactment of its
"Amazon" law, both North Carolina and Rhode Island followed
suit. As a result, online giant Overstock.com cancelled
its affiliate program in all three states, while Amazon.com
cancelled its affiliate programs in both North Carolina and
Rhode Island.
h) How Reliable are the Revenue Estimates for this Bill? :
The state's likelihood of actually collecting BOE's
"static" revenue estimate depends entirely on (1) Internet
retailers' willingness to continue their in-state affiliate
programs, and (2) out-of-state retailers' continued
willingness to sell their products on platforms like eBay
with the attendant responsibility for collecting use tax on
all sales to California consumers. The BOE has received
direct confirmation from Amazon that it will terminate its
relationship with its 10,000 California affiliates if this
bill is enacted. BOE estimates that Amazon currently
comprises roughly 50% of the Internet sales of large firms
that currently do not have nexus in California.
Consequently, the static revenue estimates cited above,
adjusted for Amazon's anticipated response, would drop to
$114 million in FY 2011-12 and $234 million in FY 2012-13.
If other firms were also to terminate their affiliate
programs in response to this bill, the potential revenue
gains would be further diminished. Additionally, the
termination of affiliate programs would have an adverse
impact on state employment, which would lead to lower
income tax revenues. The amount of these potential
reductions is unknown.
i) Legal Challenges Remain Unresolved : In November 2010, a
New York appellate court ruled for the state on certain
challenges to that state's Amazon law under the Commerce
Clause and the Due Process Clause. The court noted,
however, that additional discovery was required at the
trial court level to determine whether there was sufficient
in-state activity to establish nexus under the Commerce
Clause.
j) Recent Legislative Efforts Focused on Increasing Use Tax
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Collections : In recent years, California has taken other
steps to increase use tax compliance. Chief among these
efforts are the mandatory use tax registration program and
the permanent inclusion of a use tax line on the state's
income tax returns. Each is discussed briefly below:
i) Mandatory Use Tax Registration for Service
Enterprises : In 2009, California enacted R&TC Section
6225 seeking to increase use tax compliance among
California businesses that purchase TPP from
out-of-state. Specifically, Section 6225 requires
"qualified purchasers" to register with BOE for annual
use tax reporting. A qualified purchaser is defined as a
person that:
(1) Receives at least $100,000 in gross receipts
from business operations per calendar year;
(2) Is not required to hold a seller's permit or
certificate of registration for use tax;
(3) Does not hold a use tax direct payment permit;
and,
(4) Is not otherwise registered with BOE to report
use tax.
The BOE estimates that this mandatory registration
program will generate roughly $58.5 million in FY 2010-11
from a total of 556,012 registered accounts.
ii) Permanent Inclusion of a Use Tax Line on Income Tax
Returns : In 2010, Governor Schwarzenegger signed SB 858
(Committee on Budget and Fiscal Review) into law as part
of the FY 2010-11 Budget Agreement. Among other things,
SB 858 provided for the permanent inclusion of a use tax
line on the state's income tax returns, thereby allowing
income tax filers to fill-in the amount of use tax due on
their returns. BOE staff estimated that this provision
would increase General Fund collections by roughly $9.2
million annually.
aa) What Does the Legislative Analyst's Office (LAO)
Recommend? : At this Committee's September 28, 2011
oversight hearing on the issue, the LAO noted, "Given the
significant interstate commerce issues arising from use tax
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compliance, Congress is the most likely - and probably the
most appropriate - venue for seeking a solution on the
issue of use tax compliance."
bb) What is the Cost of Maintaining the Status Quo? : In
August 2010, Prof. Richard A. Parker of San Diego State
University issued a report reviewing the impact of
California's current use tax collection laws on economic
activity, commercial real estate values, jobs and payroll
in California. Among other things, Prof. Parker noted the
following findings:
i) California-based retail businesses are losing $4.1
billion annually in sales to exclusively online
retailers. These losses are projected to grow to $7.7
billion in 2015 and $14.3 billion in 2020;
ii) Goldman Sachs estimates that online shopping will
increase from 4.4% of all retail sales to 17.1% of all
retail sales and that since 2000, internet sales have
more than tripled; and,
iii) 18,300 full-time equivalent jobs are currently lost
as a result of out-of-state online sales. This number is
projected to grow to 34,100 in 2015 and 63,400 in 2020;
REGISTERED SUPPORT / OPPOSITION :
Support
Art Allis Supply Company
B. Alive Vitamins and Natural Foods
Barns & Noble
Betlach Desert Jewels
Book Tree
Bowlers Corner
California Democratic Party Region 8 Director Candice Easter
California Federation of Teachers
California Labor Federation
California Nurses Association
California Professional Firefighters
California Teachers Association
City of Berkeley
Copenhagen Interiors
Cuffs Boutique
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Diesel, A Bookstore
Fig Garden Bookstore
Harley-Davidson of Fresno
Heroes Comics
Janna's Needle Art
Kaleidoscope, The Parent Teacher Store
Meridian Computer
Midtown Business Association
Morgan's Village Flooring
Mrs. Dalloway's
Phono Select Records
Placer County Deputy Sheriff's Association
Sacramento County Probation Association
Slack Shoppe
Sport Chalet
Styleyes
Swanbergs on J
The Home Depot
The Reading Bug
Unitedstate - Clothing and Music Store
Vonda's at Villaggio
1 individual
Opposition
California Taxpayers Association
Direct Marketers Association
Performance Marketing Association
Tech America
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098