BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 155
                                                                  Page  1

          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 








                                                                  AB 155
                                                                  Page  2

               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 








                                                                  AB 155
                                                                  Page  3

            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, 








                                                                  AB 155
                                                                  Page  4

            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
                                                                  Page  5