BILL ANALYSIS �
AB 155
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Date of Hearing: May 11, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 155 (Calderon) - As Amended: May 2, 2011
Policy Committee: Revenue and
Taxation Vote: 5-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill expands the statutory definition of a "retailer
engaged in business in this state" to improve administration of
the state's use tax. Specifically, this bill:
Imposes a use tax collection obligation on any retailer that is
a member of a commonly controlled group and is a member of a
combined reporting group that includes another member of the
retailer's commonly controlled group that performs services in
this state in connection with tangible personal property being
sold by the retailer.
FISCAL EFFECT
1) BOE estimates that this bill would result in increased
state and local use tax collections of $83 million
annually. This estimate, however, assumes that Amazon or
other companies do not change their corporate structure or
discontinue their use of in-state companies, or otherwise
change behavior. In addition, BOE notes there may be other
companies that are similarly structured that could be
impacted by this provision. BOE notes the revenue impact
from the bill's proposed changes is subject to considerable
uncertainty.
2) Changes in corporate structure to avoid the requirements
of this bill or discontinuation of use of in-state
companies could lead to a decline in tax revenues from
other sources.
3) BOE, as well as the bill's opponents, raise the
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possibility that treating separate corporate entities as
divisions of the same corporate entity would create an
opportunity whereby intercompany sales between related
corporate entities would no longer be subject to sales tax.
Although BOE does not agree that this would occur, if it
does the revenue loss would be larger than any gain from
the expanded collections that could occur under this bill.
4) 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
1)Purpose. According to the author, each year California loses
over $1.145 billion in revenues as a result of unreported use
taxes and a large percentage of this use tax gap is
attributable to out-of-state Internet sales. More
importantly, the lack of use tax collection has provided a
competitive advantage to many out-of-state companies, allowing
them to undercut their in-state competitors. AB 155 would
help to level the playing field by imposing a use tax
collection obligation on retailers that use in-state sister
companies to help develop or sell their goods. By taking this
important step, AB 155 will promote the fair and effective
administration of California's Sales and Use Tax Law.
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 taxable sales in this state. State law
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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
BOE.
4)Out of state retailers. One of the greatest controversies in
the field of state taxation today concerns the constitutional
authority of the states to impose a use tax collection
responsibility on out-of-state retailers for the sale of goods
shipped into the taxing state. Such transactions are
generally conducted either through mail order, telephone
orders or via the Internet. A December 2010 BOE estimate of
uncollected use tax reveals that about $1.145 billion goes
unpaid annually ($795 million in uncollected use tax from
California consumers; $350 million from businesses). The
estimate indicates that the unpaid use tax liability owed by
the average California household is $61 per year and $102 per
year for each California business.
In recent years, California has taken 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.
5)Opposition. Opponents state that California courts have
already rejected "control group nexus" as a basis to require
out of state retailers to collect use tax. Moreover, they
argue that even if AB 155 could be enforced, such a
requirement would not produce additional revenue for
California as related companies can easily be relocated, or
the services they provide can easily be obtained elsewhere.
Opponents extend that instead of AB 155, the Legislature
should consider expanding California's existing, lawful and
successful program to collect use tax from the purchasers who
are responsible for payment.
6)Costs of out of state sales. 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,
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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.
c) 18,300 full-time equivalent jobs have been lost to date
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.
7)Related legislation . AB 153 (Skinner), SB 234 (Hancock) and
SB 655
Steinberg offer a different approach, but like AB 155 would
attempt to increase tax collections from out of state
retailers who sell into the state. AB 153 was heard in
committee on April 13th and was sent to the suspense file.
The bill 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.
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
AB 155
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