BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 155| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 155 Author: Charles Calderon (D), et al. Amended: 8/29/11 in Senate Vote: 27 - Urgency SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 7/6/11 AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu NOES: Huff, Fuller, La Malfa SENATE APPROPRIATIONS COMMITTEE : 6-3, 8/25/11 AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg NOES: Walters, Emmerson, Runner SENATE FLOOR : 22-12, 9/6/11 (FAIL) AYES: Alquist, Calderon, Corbett, De León, DeSaulnier, Evans, Hancock, Hernandez, Kehoe, Leno, Lieu, Liu, Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Simitian, Steinberg, Vargas, Wolk, Yee NOES: Anderson, Blakeslee, Correa, Dutton, Gaines, Harman, Huff, La Malfa, Runner, Strickland, Walters, Wyland NO VOTE RECORDED: Berryhill, Cannella, Emmerson, Fuller, Rubio, Wright ASSEMBLY FLOOR : 52-20, 5/31/11 - See last page for vote SUBJECT : Use tax: retailer engaged in business SOURCE : Author DIGEST : This bill repeals and reenacts provisions of AB CONTINUED AB 155 Page 2 28X (Blumenfield), Chapter 7, Statutes of 2011-12, First Extraordinary Session, which revises the definition of retailer engaged in business in this state for purposes of use tax collections", as specified. This bill increases the small business exemption in AB 28X from $500,000 to one million dollars and adds an urgency clause. ANALYSIS : 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 tax. State law requires every retailer "engaged in business in this state" that sells tangible personal property to collect the appropriate tax from the purchaser and remit the amount to the Board of Equalization (BOE). Unless the person pays the sales tax to the retailer, he/she is liable for the use tax, which is imposed at the same rate as the sales tax on any person consuming tangible personal property in the state. When a California resident purchases tangible personal property from a retailer online, by mail order, or on a trip to another state, and the retailer lacks physical presence in this state, the obligation rests on the consumer to remit the use tax due to BOE. Existing law, enacted by ABx1 28 (Blumenfield), revised the definition of "retailer engaged in business in this state" to include the following, for purposes of use tax collections: Any retailer that is a member of a commonly controlled CONTINUED AB 155 Page 3 group and a member of a combined reporting group that includes another member of the retailer's commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performs services in this state in connection with tangible personal property to be sold by the retailer. (controlled group of corporations nexus) Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers of tangible personal property to the retailer under specified conditions. (affiliate nexus) Any retailer that has substantial nexus with this state for the purposes of the commerce clause of the United States Constitution and upon whom federal law permits this state to impose a use tax collection duty. (long-arm nexus). Comments This bill reenacts provisions and increases the small business exemption from $500,000 to one million dollars of ABX1 28 (Blumenfield), which Governor Jerry Brown signed and became immediately effective on June 29, 2011. According to the author's office, 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. This bill will 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, this bill will promote the fair and effective administration of California's Sales and Use Tax Law. This bill, like existing law, imposes a use tax collection obligation on out-of-state retailers who have certain sister companies in California that perform services in CONTINUED AB 155 Page 4 cooperation with the out-of-state retailer, as described. Amazon.com LLC (the on-line retailer), for example, and any other similarly organized out-of-state retailer, fits within this provision. Amazon.com Inc. is a Seattle-based corporation. The on-line retailer, Amazon.com LLC, is a member of Amazon.com Inc.'s commonly controlled group and a member of Amazon.com Inc.'s combined reporting group under California's Corporation Tax Law. Amazon.com LLC's commonly controlled group has other California-based members that perform various services in this state in connection with items sold by Amazon.com LLC. For example, A9.com is a California-based wholly-owned subsidiary of Amazon.com, Inc., with about 131 California employees (as reported in September, 2010 to the Employment Development Department), and provides product and visual search technologies for items displayed on Amazon.com LLC's Web site. Another California wholly-owned subsidiary, Lab 126, (with about 370 California employees) performs design and development activities associated with Amazon's Kindle and other electronic reading devices. A third California subsidiary of Amazon.com is Internet Movie Database (IMDb), with 15 California employees, is an online database of information related to movies, television shows, actors, production crew personnel, video games and fictional characters featured in visual entertainment media. This bill, consistent with existing law, specifies that such described out-of-state retailers are engaged in business in California, based on the activities of their other members of their combined reporting group, and are required to collect California use tax on their taxable sales to California consumers. This specific form of nexus has not been reviewed by the U.S. Supreme Court and could be the subject of litigation. Amazon, one of the largest out-of-state retailers that does not currently collect and remit California use taxes, has filed a petition for a referendum that will allow voters decide whether to overturn AB 28X. The petition has been approved by the Attorney General, and Amazon has until late September to collect 504,000 signatures in order to qualify the referendum for the next statewide election in February of 2012. CONTINUED AB 155 Page 5 FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Small business exemptionUnknown, revenue loss associated General with increasing exemption threshold from $500 to $1,000. SUPPORT : (Per Senate Governance and Finance Committee of 7/6/11) (unable to reverify) "M" is for Mystery?and more 99 Cent and Plus Alicante Group American Federation of State, County and Municipal Employees, AFL-CIO Angela's Glass Co. A-Vacuum & Sewing Hospital Barnes & Noble Best Buy Blackmaster Video Blong Ziong, Fresno City council Member Bluestocking Books Bright Cleaners C&M Custom Cabinetry California Business Properties Association California Conference Board of the Amalgamated Transit Union California Conference of Machinists California Labor Federation California Nurses Association California Retailers Association California School Employees Association California State Association of Counties California Tax Reform Association California Teamsters Public Affairs Council CONTINUED AB 155 Page 6 Central Valley Laminating Chalet Gourmet Chi Holistic Collective Chino Hills Network Citizens for Better city Government City of Berkeley Column One, Inc. Culver City Chamber of Commerce Custom Cabinets by Kumar Custom Leisure Services Da Avere Davies Appliance DjMobile Detailing DLG Printing Dollar and Up Dragatomi Dreamweaver Early Ford Store Echo Antique Gallery Empire Vintage Clothing Employee Awareness Alliance Engineers and Scientists of California FanaBike Enterprises Fontanetti's Batting Cages & More Forefront Real Estate Glendora Floor Store, Inc. Glendora Village Goldsmith Glendora Village Pets GOGA by Gordana Goldstrand Planning Group Greater Merced Chamber of Commerce Greater Stockton Chamber of Commerce GT-R Wireless Hart Environmental, Inc. Her Best Friends Closet Herbin Acupuncture and Wellness Hermary's Home Entertainment Lifestyles Hessian Inc. Home Depot International Longshore & Warehouse Union John Carlisle, Merced City council Member John R. Hanna, Rancho Santiago Community College District Trustee Ken Krause, Waterford City Council member CONTINUED AB 155 Page 7 Kim's Alterations Latino Times/former Chair California Hispanic Chamber of commerce Leach Housekeeping Lisa Norman Lingerie Lopez Landscape Magic Moments Portraits Main Farms MARTtoMART Michelle Marie's Café, LLC Mohr Clocks Momma's Closet Montana EyecareMontana NaturalMs. Fits Consignments N.V.me Fashions Namedroppers Natural Health Center Nelson's Drug Store Neufelds Promenade Northern California Independent Booksellers Association Origano Restaurant Periwinkle Phariss Tax Service Planet Videos and More Postnet Professional & Technical Engineers, Local 21 Pulp Studio Punk Bananas Thrifty Store Quesenberrys Pharmacy Ray Main Sales Reid hardware Relles Florist Repeat Performance Rick's Furniture Sake House Yumeya LLC San Diego Trading Company San Francisco Chamber of Commerce Sary Moon Senor El Taquero Signs-A-Rama Sixth Avenue Mail Station Small Business California Southern California Independent Booksellers Association Strings Music Stuart Spencer CONTINUED AB 155 Page 8 Sudberry Properties Sugar Hill Sumner's Schwinn Sunlight of the Spirit Books and Gifts Swanbergs on J TechAmerica The Cotton Club The Fresno Hock Shoppe The Mugger, Inc. The Shoe Shop The Usuals The Whistle Stop Tina's One Stop Shop Tom Stallard, Woodland City Council Member Tower Hydro Tree Time Real Estate Treeline Realty T-Shirt Designs UNITE HERE! United Food and Commercial Workers Union, Western States Council Valadez Jewelers Village Book Shop Village Kitchen Shoppe Village Manor Visiting Angels Wal-Mart Weathervane for Men Webster's Sportscards OPPOSITION : (Per Senate Governance and Finance Committee of 7/6/11) (unable to reverify) California Taxpayers Association Direct Marketing Association Howard Jarvis Taxpayers Association Internet Alliance Performance Marketing Association ARGUMENTS IN SUPPORT : 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. CONTINUED AB 155 Page 9 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. " ARGUMENTS IN OPPOSITION : 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." ASSEMBLY FLOOR : 52-20, 5/31/11 AYES: Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Fuentes, Furutani, Galgiani, Gatto, Gordon, Hall, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning, Pan, Perea, V. Manuel Pérez, Portantino, Skinner, Solorio, Swanson, Torres, Wieckowski, Williams, Yamada, John A. Pérez NOES: Achadjian, Cook, Donnelly, Fletcher, Beth Gaines, Grove, Hagman, Halderman, Harkey, Jeffries, Knight, Logue, Mansoor, Miller, Morrell, Nielsen, Silva, Smyth, Valadao, Wagner NO VOTE RECORDED: Cedillo, Conway, Garrick, Gorell, Jones, Nestande, Norby, Olsen AGB:do 9/8/11 Senate Floor Analyses CONTINUED AB 155 Page 10 SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED