BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   AB 155|
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                                 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 
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          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 

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            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 

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          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.



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           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

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          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

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          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

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          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. 

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           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 


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                         SUPPORT/OPPOSITION:  SEE ABOVE

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