BILL ANALYSIS Ó
AB 153
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Date of Hearing: April 13, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 153 (Skinner) - As Introduced: January 18, 2011
Policy Committee: Revenue and
Taxation Vote: 5-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill 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 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 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 tangible personal property.
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FISCAL EFFECT
1) The Board of Equalization (BOE) estimates increased state
and local revenues of $152 million in fiscal year (FY)
2011-12 and $317 million in FY 2012-13, assuming full
retailer compliance and little change in behavior, in
response to the change in law. These estimates are based on
the combination of the amount of revenues currently being
collected in New York, adjusted for California's larger
economy and 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.
The Board of Equalization (BOE) notes that its revenue
estimate for this bill is subject to "considerable
uncertainty." Moreover, there could be a delay in
collections due to potential litigation challenging this
measure.
These estimates do not take into account the many possible
behavioral changes that could occur if this bill were
implemented. BOE notes the state's likelihood of actually
realizing the revenues described in the previous paragraph
depends entirely on an Internet retailers' (such as Amazon
and Overstock) willingness to continue their affiliate
programs, and other retailers' willingness to continue to
sell on eBay and to fully comply with the added use tax
collection obligations imposed by this bill. As such,
revenues could be considerably lower if out of state
retailers cancel their agreement with the affiliates. Such
an action could also lead to a decline in personal income
tax collections. Affiliates earn revenues, and pay income
taxes, from sales that they facilitate that originate with
California consumers, but also from consumers anywhere in
the rest of the world.
2) BOE would incur significant administrative costs in the
low hundreds of thousands of dollars, to implement the
provisions of this bill. The state would likely face
significant litigation expenses owing to the legal
uncertainty surrounding the bill's approach.
COMMENTS
AB 153
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1) Rationale for the 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. The author contends that 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.
2) Federal law. The Commerce Clause of the U.S. Constitution
authorizes Congress to regulate commerce with foreign
nations, and among the states. The U.S. Supreme Court has
held that the "negative" or "dormant" Commerce Clause, which
is an inference drawn from the Commerce Clause, prohibits
states from enacting laws that unduly burden or discriminate
against interstate commerce. There is federal case law that
a retailer must have a physical presence in a state before
that state can require the retailer to collect its use tax.
The predominant case is a 1992 U.S. Supreme Court ruling in
Quill Corporation v. North Dakota.
3) State law. Existing law 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 TPP sales in this state.
State law also imposes a complementary use tax on the
storage, use, or other consumption in this state 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 BOE.
4) Is affiliate nexus constitutional? The New York Appellate
court has determined that establishing nexus through
affiliate relationships are not unconstitutional on their
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face. However until there is a decion, and is upheld on
appeal, that the physical presence requirement affirmed in
Quill is outdated, there is a question whether this form of
affiliate nexus will be found to be in conformance with the
dormant commerce clause.
5) Opponents concerns: According to the opponents who
include retailers such as Amazon and Overstock.com, 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 would sever their ties
with affiliates in California. Then non-California website
companies and organizations would become the ultimate
beneficiaries of AB 153 because the out-of-state retailers
would simply switch affiliates and continue to have access
the California market, while avoiding avoid the state's use
tax laws as well as the state's income tax.
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. The provisions would apply to 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 (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 and 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. It is these
provisions that have led eBay to oppose AB 153, unless it is
amended to exempt what they describe as small businesses.
6) 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. Affiliates are concerned that
out-of-state retailers with affiliate programs will
terminate their agreements with them should California enact
this bill. The association has estimated that California
will lose approximately $40 million in personal income tax
collections annually that were paid by affiliates.
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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 has
stated that it will terminate its relationship with its
California affiliates should California enact this
provision.
7) Related legislation . AB 155 (Calderon), SB 234 (Hancock)
and SB 655
Steinberg offer a different approach, but like AB 153 would
attempt to increase tax collections from out of state
retailers who sell into the state.
8) Previous legislation. During the 2009-10 Legislative
Session and various extraordinary sessions during that
period, seven more bills containing click through nexus
provisions similar to this bill were introduced. Only one
passed the Legislature - SBx3 17 (Ducheney), but it also
contained several other provisions related to tax
enforcement and tax administration, and was vetoed by
Governor Schwarzenegger.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081