BILL ANALYSIS �
AB 153
Page A
ASSEMBLY THIRD READING
AB 153 (Skinner)
As Amended May 27, 2011
Majority vote
REVENUE & TAXATION 5-2 APPROPRIATIONS 12-5
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|Ayes:|Perea, Charles Calderon, |Ayes:|Fuentes, Blumenfield, |
| |Cedillo, Fuentes, Gordon | |Bradford, Charles |
| | | |Calderon, Campos, Davis, |
| | | |Gatto, Hall, Hill, Lara, |
| | | |Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Donnelly, Harkey |Nays:|Harkey, Donnelly, |
| | | |Nielsen, Norby, Wagner |
| | | | |
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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 Web site, 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 $500,000.
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 described above shall not include
any agreement under which a retailer:
a) Purchases advertisements from a person in this state, to
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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 TPP; or,
b) Engages a person in this state to place an advertisement
on a website 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.
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
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).
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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.
FISCAL EFFECT : Unknown. BOE has not yet had a chance to update
its fiscal estimate to reflect the most recent amendments taken
on May 27, 2011, out of the Assembly Appropriations Committee.
Those amendments will almost certainly reduce estimated
revenues.
COMMENTS : 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.
Assembly Revenue and Taxation Committee staff Comments:
1)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 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.
2)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
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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 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>
3)What would this bill do? : Revenue and Taxation Code 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
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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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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 Department 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.
4)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 California's use tax. <2>
This, in turn, places these companies at a competitive
advantage vis-�-vis California-based businesses, which must
collect and remit sales tax.
5)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.
6)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
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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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three states, while Amazon.com cancelled its affiliate
programs in both North Carolina and Rhode Island.
7)What is the cost of maintaining the status quo? : In August
2010, Professor 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, Professor Parker noted the
following findings:
a) 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;
b) 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,
c) 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.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
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