BILL ANALYSIS
AB 2078
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Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2078 (Charles Calderon) - As Amended: April 5, 2010
Majority vote. Fiscal committee.
SUBJECT : Use tax: retailers engaged in business in this state
SUMMARY : Modifies the statutory definition of a "retailer
engaged in business in this state" and implements new notice and
reporting requirements to improve administration of the state's
use tax. Specifically, this bill :
1)Establishes a rebuttable presumption that specified retailers
are "engaged in business in this state" and are therefore
required to collect use tax on sales of tangible personal
property (TPP) to California consumers. Specifically, a
retailer shall be presumed to be engaged in business in this
state if the retailer is part of a "controlled group of
corporations" with a "component member" that meets the current
statutory definition of a retailer engaged in business in this
state.
a) Specifies that this presumption may be rebutted by
evidence that, during the calendar year at issue, the
"component member" did not engage in any of the statutorily
specified activities that define a retailer engaged in
business in this state on behalf of the retailer.
b) Defines a "controlled group of corporations" by
reference to Internal Revenue Code (IRC) Section 1563(a).
c) Defines a "component member" by reference to IRC Section
1563(b).
2)Provides that any retailer selling taxable TPP, that is not
required to collect use tax, shall provide a notice on its
retail website or catalogue that California law imposes use
tax on non-exempt TPP purchased from the retailer, and that
the consumer must pay the tax. This notice must be readily
visible.
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3)Requires every person who sells TPP subject to use tax, who is
not registered with the State Board of Equalization (BOE), to
file with BOE, on or before the last day of the calendar month
following each quarterly period, a report setting forth the
following:
a) The names and addresses of purchasers of the TPP;
b) The sales price of the property;
c) The date of sale; and,
d) Such other information as BOE may require.
4)Provides that this reporting requirement shall not apply to
any person whose receipts from sales described above are less
than $100,000 in the prior year, and are reasonably expected
to be less than $100,000 in the current year.
5)Specifies that this bill's provisions are severable. If any
provision of this bill or its application is held invalid,
that invalidity shall not affect the other provisions of the
bill.
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
interstate commerce.
2)Provides 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.
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 of TPP purchased out of state and brought into
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California. The use tax is imposed on the purchaser , and
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
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.
Specifically, a "retailer engaged in business in this state"
includes any retailer who:
a) Maintains, occupies, or uses, permanently or
temporarily, directly or indirectly, or through a
subsidiary, or agent, by whatever name called, an office,
place of distribution, sales or sample room or place,
warehouse or storage place, or other place of business;
b) Has any representative, agent, salesperson, canvasser,
independent contractor, or solicitor operating in this
state under the authority of the retailer or its subsidiary
for the purpose of selling, delivering, installing,
assembling, or the taking of orders for any TPP; or,
c) Derives rentals from a lease of TPP situated in this
state.
4)Grants BOE the authority to require the filing of reports by
any person with information related to sales of TPP subject to
use tax. Provides that these reports shall be filed when BOE
requires and shall set forth the names and addresses of
purchasers, the sales price of the property, the date of sale,
and such other information as BOE may require.
FISCAL EFFECT : Indeterminate. BOE staff note, "To the extent
compliance with this bill is achieved, state and local revenues
could increase. However, it is difficult to determine with any
degree of certainty the amount of any increase.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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According to BOE, over $1 billion in state and local
revenue is lost each year from unreported use tax
associated with out-of-state Internet and mail order sales.
AB 2078 provides a comprehensive approach for closing this
use tax gap. First, this bill would require non-collecting
retailers to provide a notice on their web site or
catalogue informing consumers that California's use tax
applies to certain purchases and must be paid directly by
the consumer. Second, large non-collecting retailers would
be required to file quarterly reports with BOE setting
forth relevant information concerning sales made to
California consumers. Finally, AB 2078 would provide that
any retailer that is part of a controlled group of
corporations with a component member that is a retailer
engaged in business in this state, shall also be presumed
to be a retailer engaged in business in this state. This
presumption, in turn, could be rebutted by appropriate
evidence. By taking these three simple steps, AB 2078 will
promote the fair and effective administration of
California's Sales and Use Tax Law.
2)Proponents of this bill state, "The state is currently facing
a $20 billion budget deficit and needs to do everything it can
to collect all the tax dollars that are owed to it.
Currently, there exists a major loophole in California's tax
law in which online affiliates and out-of-state retailers sell
to California consumers without collecting California use
taxes on those sales. This puts [brick-and-mortar] retailers
in California at an economic disadvantage because they are
required to collect sales taxes. We applaud your effort to
enact legislation to close this tax loophole."
3)Opponents of this bill state that AB 2078 "seeks to commandeer
private out-of-state retailers to aid in tax collection work
for which California does not devote its own resources."
Opponents also state, "[AB 2078] violates the Commerce Clause
of the U.S. Constitution, and would inappropriately infringe
upon the privacy rights of California consumers."
4)Committee Staff Notes
a) The Legal Landscape : There is, under existing law, a
certain degree of ambiguity concerning when a state may
legally compel an out-of-state retailer to collect the
state's use tax on sales to state residents. In Quill
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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 out-of-state retailer through its
catalog, 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 nearly $1.1 billion in
revenues each year.
b) Alternative Methods for Addressing the Use Tax Gap :
States have adopted different methods for addressing this
use tax gap. Most notable are the "Amazon" approach first
adopted by New York, and the approach taken more recently
by the State of Colorado.
i) The "Amazon" Approach : Revenue and Taxation Code
Section 6203 specifies those retailers considered to be
engaged in business in this state - in other words, it
lists those retailers that are considered to have a
"physical presence" sufficient to impose a use tax
collection obligation. In 2009, Assembly Members Skinner
and Charles Calderon jointly introduced AB 178 which
would have added to this statutory list certain
"out-of-state" retailers that use California residents,
often referred to as "affiliates," to promote business.
The bill was modeled after the so-called "Amazon"
legislation passed in New York. New York, and other
states that have enacted similar bills, argue that if a
remote vendor (like Amazon) uses an affiliate marketing
program, the vendor's in-state activities satisfy Quill 's
physical presence requirements and thus create SUT nexus
for the vendor. Specifically, this argument is based on
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the theory of "attributional" nexus, as established in
Scripto, Inc. v. Carson , (1960) 362 U.S. 207 and Tyler
Pipe Indus. v. Washington State Dep't of Revenue , (1987)
483 U.S. 232, which holds that if a retailer has in-state
agents that sell on the retailer's behalf, the in-state
agents may establish nexus on behalf of the out-of-state
retailer.
Proponents of AB 178 noted that many out-of-state retailers
use California residents to drive business, take full
advantage of California's consumer base, but refuse to
collect California's use tax.<1> This, in turn, places
these companies at a competitive advantage vis-?-vis
California-based businesses, which must collect and remit
sales tax.
Opponents of AB 178 argued that the legislation would
cause out-of-state retailers to terminate their affiliate
relationships with California residents. This, they
argued, would place the jobs of California affiliates at
risk in an already troubled economic climate. In
addition, critics argued that affiliates operate far
differently from the sales force "actively engaged" on
behalf of Scripto, Inc. Specifically, they noted that
the work of most affiliates is passive, and that
affiliates do not call on customers or directly solicit
orders.
Additionally, while the New York Supreme Court (which
acts as the state's trial court) has upheld the state's
Amazon legislation, there is no guarantee that the law
will pass constitutional muster on appeal. Thus, states
adopting Amazon legislation should expect to be engaged
in protracted litigation until the issue is settled in
the courts.
Finally, out-of-state retailers have followed through on
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<1> Amazon, Inc. collects tax in only five states: Washington,
North Dakota, Kentucky, Kansas, and New York. Indeed, it would
seem that tax avoidance has been a longstanding priority for
Amazon, Inc. founder Jeff Bezos, who originally considered
citing his company on an Indian reservation near San Francisco
for tax avoidance purposes. ("Sorry, Shoppers, but Why Can't
Amazon Collect More Tax?," Randall Stross, New York Times,
December 26, 2009).
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their threats to terminate affiliate contracts in states
that adopt Amazon legislation. After New York's
enactment of its "Amazon" law, both North Carolina and
Rhode Island followed suit. As a result, online giant
Overstock.com cancelled its affiliate program in all
three states, while Amazon.com cancelled its affiliate
programs in both North Carolina and Rhode Island.<2>
Moreover, on June 29, 2009, the California Legislature
actually passed a majority vote tax enforcement bill [SB
X3 17 (Ducheny)], which included Amazon provisions. The
Governor, however, vetoed the bill, and thereafter issued
a press release noting that Overstock.com had reversed
its decision to terminate its affiliate program in
California.
ii) The "Colorado" Approach: In its effort to increase
use tax collections, the State of Colorado has taken a
different path from the one forged by New York. On
February 24, 2010, Colorado Governor Bill Ritter signed
into law HB 1193, which imposes a set of notice and
reporting requirements on retailers that do not collect
the state's use tax. Specifically, under HB 1193,
non-collecting retailers must:
(1) Notify consumers that SUT is due on certain
purchases and that, under state law, the consumer must
file a SUT return. Absent reasonable cause, failure
to provide this notice will result in a penalty of $5
for each failure;
(2) Send consumers an annual notice showing the
total amount of purchases made in the prior calendar
year. In addition, the notice must inform consumers
of their obligation to file appropriate SUT returns.
The notice must be sent separately by first class mail
with the marking, "Important Tax Document Enclosed."
Absent reasonable cause, failure to provide this
notice will result in a penalty of $10 for each
failure; and,
(3) File an annual statement for each consumer
with the state's Department of Revenue showing the
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<2> White, Nicola M., Vermont to Consider 'Amazon' Law, Tax
Analysts, February 4, 2010.
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total amount paid for purchases during the preceding
calendar year. Absent reasonable cause, failure to
file this annual statement will result in a penalty of
$10 for each consumer that should have been included
in the statement.
HB 1193 also provides that if a non-collecting retailer
is part of a controlled group of corporations with a
component member that is a retailer with physical
presence, the non-collecting retailer shall be presumed
to be doing business in the state.
Critics of the Colorado approach argue that the law's
reporting regime is tantamount to requiring use tax
collection, because it includes features like audits and
penalties for failure to comply. In addition, critics
state, "Colorado's information reporting requirement is
excessive - and perhaps results in a reporting regime
that is ironically more burdensome than the tax
collection obligation struck down in Quill." (Kranz,
Smith, and Freeman, Colorado's End Run: Clever, Coercive,
and Unconstitutional, Tax Analysts, April 5, 2010.)
Despite the fact that HB 1193 does not attribute nexus
based on the activity of in-state affiliates, Amazon.com
terminated its Colorado affiliates on March 8, 2010. It
is unclear whether this decision was motivated by a
desire to avoid tax collection or was simply intended as
a warning to other states considering similar
legislation.
iii) The Approach Taken by AB 2078 : Modeled loosely on
Colorado law, AB 2078 attempts to close California's
considerable use tax gap in three ways:
(1) First, AB 2078 provides that any retailer that
is part of a controlled group of corporations with at
least one member that is a retailer engaged in
business in this state, shall be presumed to be a
retailer engaged in business and, as such, shall have
an obligation to collect the state's use tax. This
language is substantially similar to that adopted by
Colorado in HB 1193.
(2) Second, this bill would require non-collecting
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retailers to provide a notice on their website or
catalogue informing consumers that California's use
tax applies to certain purchases and must be paid
directly by the consumer. AB 2078's notice
requirements are far less burdensome than those
adopted by Colorado. As noted above, Colorado law
requires non-collecting retailers to send consumers,
by first class mail, an annual notice showing the
total amount of purchases made in the prior calendar
year. In addition, Colorado law imposes a penalty of
$10 for each failure to provide this notice.
(3) Finally, this bill would require large,
non-collecting retailers to file quarterly reports
with BOE setting forth relevant information concerning
sales made to California consumers. Colorado law, in
turn, requires the filing of an annual statement for
each consumer with the state's Department of Revenue
and imposes a penalty of $10 for each failure to do
so.
c) Potential Issues :
i) Are the Rebuttable Presumption Provisions
Necessary? : BOE staff notes that, under controlling case
law, an out-of-state retailer is considered to have
sufficient nexus, and is required to collect the state's
use tax, if an in-state retailer acts on the out-of-state
retailer's behalf (regardless of whether the relationship
between the out-of-state and in-state retailers fits
within the IRC's definition of a "controlled group of
corporations." (See Borders Online, LLC v. State Board
of Equalization , (2005) 129 Cal.App.4th 1179.) For
example, if an in-state retailer accepts merchandise
returns on behalf of the out-of-state retailer, BOE
regards the out-of-state retailer as being engaged in
business in this state and therefore under an obligation
to collect California's use tax. However, this provision
may help BOE in certain circumstances, because the
out-of-state retailers would have the burden of showing
that the in-state component member does not act on its
behalf, whereas currently BOE must discover evidence that
the in-state retailer acts on the out-of-state retailer's
behalf.
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ii) What Happens if a Non-Collecting Retailer Fails to
Comply with the New Notice and Reporting Requirements? :
Controlling case law clearly prohibits states from
requiring a remote retailer to collect use tax unless the
retailer has a "physical presence" in the state. It is
unclear, however, how a court would look upon this bill's
notice and reporting requirements. Moreover, unlike
Colorado's law, this bill does not contain any penalties
for non-compliance. The author may wish to amend the
bill to provide appropriate penalties should a
non-collecting retailer fail to comply with the new
notice and reporting requirements.
iii) How Would Non-Collecting Retailers Report
Information to BOE? : BOE could receive a significant
volume of additional information under this bill. As
such, the author may wish to amend the bill to specify
that the information shall be provided in a manner
prescribed by BOE (e.g., requiring large retailers to
report information electronically.)
iv) Privacy Issues : Many consumers prefer to make
certain purchases online because they can do so with
relative anonymity. This bill could raise concerns by
requiring out-of-state retailers to share private
information and buying habits with a government tax
agency. Any information obtained by BOE, however, would
be subject to strict privacy protections. Moreover, in
the age of web-based searches and shared credit-card
information, this notion of consumer privacy may
unfortunately be somewhat antiquated.
REGISTERED SUPPORT / OPPOSITION :
Support
California Tax Reform Association
Opposition
California Chamber of Commerce
California Taxpayers' Association
Direct Marketing Association
TechAmerica
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Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098