BILL ANALYSIS Ó
AB 155
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ASSEMBLY THIRD READING
AB 155 (Charles Calderon)
As Amended May 2, 2011
Majority vote
REVENUE & TAXATION 5-2 APPROPRIATIONS 12-5
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|Ayes:|Perea, Beall, Charles |Ayes:|Fuentes, Blumenfield, |
| |Calderon, 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 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, as defined, and is a member of a
combined reporting group, as defined, that includes another
member of the retailer's commonly controlled group that performs
services in this state in connection with tangible personal
property (TPP) to be sold by the retailer. Qualifying services
include, without limitation, the design and development of TPP
sold by the retailer, or the solicitation of sales of TPP on the
retailer's behalf.
EXISTING FEDERAL LAW :
1)Authorizes Congress, under the commerce clause of the United
States (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
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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.
FISCAL EFFECT : The BOE:
1)Estimates that this bill would result in increased state and
local use tax collections of $83 million annually. 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.
2)As well as the bill's opponents, raise the possibility that
treating separate corporate entities as divisions of the same
corporate entity would create an opportunity intercompany
sales between related corporate entities would no longer by
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.
3)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.
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COMMENTS :
The author has provided the following statement in support of
this bill:
Each year, California loses over $1.145 billion in
revenues as a result of unreported use taxes. 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.
Proponents state, "ÝAB 155] is a pragmatic and thoughtful
approach that strikes the appropriate balance between the
state's need to close the use tax gap while also protecting
California's burgeoning high tech industry from any adverse
impacts." Proponents also state, "We believe that ÝAB 155],
though novel, is also fair, practicable and enforceable by
focusing on the corporate family relationship of a parent and
subsidiary working in concert with one another, rather than the
mere contractual relationship that exists between an affiliate
marketer and the company it advertises on the behalf of."
Opponents state, "ÝW]e oppose AB 155 because the California
courts have already rejected "control group nexus" as a basis to
require out of state retailers to collect use tax. Moreover,
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 also state, "Instead of AB
155, we encourage the Legislature to consider expanding
California's existing, lawful and successful program to collect
use tax from the purchasers who are responsible for payment."
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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
surrounding 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 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
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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? : This bill would establish a new and
rather novel approach for reducing the use tax gap.
Specifically, it would impose a use tax collection obligation
on "out-of-state" retailers with in-state sister companies
that provide services connected to the retailer's sales of
TPP. Qualifying services would include the design and
development of TPP sold by the retailer, or the solicitation
of TPP sales on the retailer's behalf.
4)What impact, if any, would this bill have on California
affiliates? : Unlike the more traditional "Amazon" approach,
this bill would not attribute nexus to remote vendors based on
the activity of in-state affiliates. Indeed, this bill makes
absolutely no reference to affiliates and would instead
attribute nexus based on the activities of in-state sister
companies. Nevertheless, in a February 24, 2011, letter to
BOE Member George Runner, Amazon stated that it will terminate
its relationships with well over 10,000 affiliates if
California adopts any of the use tax collection proposals
currently pending in the Legislature, including AB 155
(Charles Calderon).
5)The legal landscape : Some critics have suggested that the
approach taken by AB 155 is prohibited by the Court of
Appeal's decision in Current, Inc. v. State Board of
Equalization (1994), 24 Cal.App.4th 382. As such, a more
detailed examination of this case is warranted.
Current, Inc. (Current) was an out-of-state mail order company
based in Colorado. In 1987, Current was acquired by Deluxe
Corporation (Deluxe), which had "considerable commercial
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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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contacts within California." Id. at 385. Thereafter, BOE
asserted that Current had an obligation to collect
California's use tax under Revenue and Taxation Code Section
6203(g). Id. At the time, subdivision (g) imposed a
collection duty on "Ýa]ny retailer owned or controlled by the
same interests which Ýsic] own or control any retailer engaged
in business in the same or similar line of business in this
state." Id.
On review, the Court of Appeal held that Current's physical
nexus with the State of California was insufficient to justify
the imposition of a use tax collection duty. Id. at 391. In
reaching this conclusion, the Court noted that neither Current
nor Deluxe was the alter ego or agent of the other for any
purpose. Id. at 388. Neither solicited orders for the
products of the other. Id. Moreover, each company had its
own trade name, goodwill, marketing practices and customer
lists and each marketed its products independently of the
other. Id. Finally, the Court noted that both companies were
organized and operated as separate and distinct corporate
entities. Id.
Thus, the facts presented in Current are substantially
different from those contemplated by this bill. Current
stands for the proposition that common corporate ownership is,
by itself, an insufficient basis upon which to impose a use
tax collection duty. AB 155 (Charles Calderon), however, does
not disregard the distinct legal status of affiliated
corporations. Instead, it asserts nexus in cases where an
affiliated corporation with California presence is designing
and developing TPP to be sold by the retailer, or soliciting
sales of TPP on the retailer's behalf. Such affiliated
companies would appear to be actively engaged in both
promoting and facilitating the remote vendor's sales of TPP.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
FN: 0000949
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