BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 2078 - Calderon
Amended: June 16, 2010
Hearing: June 23, 2010 Fiscal: Yes
SUMMARY: Enacts Two Changes to Increase Collection of the
Use Tax on Purchases Made from Out-of-State
Retailers
EXISTING LAW (United States Constitution) grants the
power to Congress to "regulate Commerce with foreign
nations, and among the several states, and with the Indian
Tribes;" a provision widely known as the Commerce Clause
(Article I, Section 8). If Congress fails to regulate
interstate commerce wholly or in part, the United States
Supreme Court has asserted consistently that the
Constitution still precludes states from doing so, known as
the "dormant" or "negative" Commerce Clause. Additionally,
the 14th amendment states that no state may "deprive a
person of life, liberty, or property without due process of
law."
Under the foundational Complete Auto Transit v. Brady,
430 U.S. 274, 97 S.Ct. 1076 (1977), states may tax
interstate business without violating either the Commerce
or Due Process clauses; however, the taxpayer must have
nexis, the tax must be fairly apportioned and
non-discriminatory, and a fair relationship between the tax
and the services provided must exist. The Court clearly
stated that its holding applied to income taxes, franchise
taxes, and sales taxes.
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The Court subsequently refined its view of nexis for
purposes of sales and use taxes in Quill Corp. v. North
Dakota, 504 U.S. 278 (1992). The Court held that
compelling out-of-state retailers to collect and remit
sales and use taxes did not violate the Due Process Clause,
but such a requirement did violate the commerce clause.
The Court found that North Dakota's statute compelling a
vendor who advertises three times in a single year or makes
three phone calls soliciting sales in the state to collect
sales and use taxes unduly burdens interstate commerce.
Since Quill, states have been legally barred from forcing
retailers that lack physical presence in a state from
collecting the use tax
EXISTING STATE LAW requires every retailer "engaged in
business in this state" that sells tangible personal
property to collect the appropriate tax from the purchase
and remit the amount to the Board of Equalization, known as
the sales tax. Unless the person pays the sales tax to the
retailer, he or she is liable for the use tax, which is
imposed on anyone consuming tangible personal property
purchased from a retailer. The use tax is the same rate as
the sales tax, and must be remitted on or before the last
day of the month following the quarterly period in which
the person made the purchase. Under Quill, when a
California resident purchases tangible personal property
from a retailer that lacks physical presence in the state,
he or she must remit the use tax due.
EXISTING STATE LAW defines "engaging in business in
this state" as:
Any retailer maintaining, occupying, or using, an
office, place of distribution, sales or sample room,
warehouse or storage place, or other place of
business, regardless of whether the retailer utilizes
the above on a temporary or permanent basis, directly
or indirectly, or through a subsidiary or affiliate.
Any retailer having any representative, agent,
salesperson, canvasser, independent contractor, or
solicitor operating in the state under the authority
of the retailer or its subsidiary for the purposes of
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delivering, installing, assembling, or the taking of
orders for any tangible personal property.
Derives rental income from leases within the state.
THIS BILL requires each retailer making sales of
tangible personal property, the storage, use or other
consumption of which is subject to tax, which is not
required to collect use tax, to submit to BOE on or before
the last day of the calendar month following each quarterly
period, a report that sets forth the names and addresses of
purchasers of the tangible personal property, the sales
price of the property, the date of sale, and any other
information that the Board may require. The measure
exempts from the requirement those retailers with less than
$100,000 in receipts from sales from the prior year, and
reasonably expect to sell less than that.
THIS BILL requires the same retailers to provide a
readily visible notification on its retail Internet Web
site or retail catalogue that tax is imposed by this part
on the storage, use, or other consumption in this state of
the tangible personal property purchased from the retailer
that is not exempt, and is required to be paid by the
purchaser.
FISCAL EFFECT:
BOE states that because it is unclear whether
out-of-state firms would comply with the bill, or whether
taxpayers would voluntarily report more use tax to BOE, AB
2078 has possible revenue increases which cannot be
calculated with any certainty.
COMMENTS:
A. Purpose of the Bill
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The author provided the following statement:
"According to the California Board of Equalization,
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
seeks to close this sales and use tax collection gap
by requiring specified retailers to provides notice to
California consumers that they (consumers) are
responsible for paying use tax on certain purchases in
an effort to improve the collection of these taxes in
the state."
B. Call Me Ishmael
Since Quill, states have sought ways to compel
retailers that lack brick and mortar establishments to
collect sales tax on tangible personal property sold into
the state. Pursuing retailers make sense because of scale:
retailers can collect and remit the obligation from many
taxpayers, whereas deploying auditors to pursue consumers
who do not send BOE the use tax is rarely a cost-effective
use of audit resources unless the amounts purchases are
considerable. The Use Tax line on California's income tax
form resulted in paltry amounts that only once exceeded $10
million since enacted, when BOE estimates that compelling
retailers currently hiding behind Quill would result in
approximately $1 billion in revenue, and end the current
competitive advantage these firms enjoy over retailers with
physical presence in the state that state law requires to
collect and remit the sales tax, with a statewide rate of
9.2% a tax law-driven distortion and a competitive
advantage.
Herman Melville's Captain Ahab pursued Moby Dick until
his death; states have tried to capture its white whale,
Washington-based Amazon.com, with similar fervor. The firm
has annual revenue upwards of $20 billion, net income of
approximately $300 million and market capitalization
upwards of $50 billion, but collects and remits no sales
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and use taxes to California despite its estimated billions
of sales into California, manufacture of its kindle
products in California through a subsidiary, and
advertisment through California-based third party sellers
and internet affiliates. According to the New York Times,
founder Jeff Bezos tried initially forming the firm on an
Indian Reservation in San Francisco in an attempt to avoid
taxation, and that the firm only collects and remits taxes
in five states. The firm recently warned investors that
having to collect sales and use taxes could decrease future
sales.
AB 2078 represents the most recent attempt to cajole
more tax revenue from consumers making internet sales from
firms such as Amazon by making such firms that do not
collect and remit to the state to report to the BOE on
Californians who make tax-free purchases from them, and to
post a visibly noticeable reminder of the purchaser's tax
obligations.
C. I'm Going to Tell on You
Recent amendments to AB 2078 require retailers that do
not collect use tax on behalf of its customers to report to
the BOE all the names and addresses of its purchasers along
with other information. Presumably, BOE would take this
information and seek to compel purchasers to remit use tax.
Opponents state that this requirement would flood the BOE
with information, which when combined with the recent use
tax registration program, could result in audits for
undeserving individuals and businesses. Proponents
counter that BOE knows how to adequately process and make
use of the information, and will only make efforts to seek
use tax remission that justifies its costs, as it does in
its current tax collection programs.
D. Reach Out and Touch Someone
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California cannot directly compel firms that lack
physical presence to collect and remit the sales and use
tax without violating the United States Constitution.
While AB 2078 is a significantly less ambitious attempt
than those the Legislature has approved and other states
have enacted, opponents argue that the measure in its
current form is similarly constitutionally lacking and
unenforceable because the state cannot compel firms that
lack physical presence to report to the BOE on its sales or
post a notice on its website.
E. I Don't Know Why You Say Goodbye I Say Hello
The June 16th, 2010 amendments to AB 2078 reinsert the
provision that requires out-of-state retailers that do not
collect use tax to submit to BOE on or before the last day
of the calendar month following each quarterly period, a
report that sets forth the names and addresses of
purchasers of the tangible personal property, the sales
price of the property, the date of sale, and other
information, which was deleted by the Assembly Revenue and
Taxation Committee. If the Senate approves the measure in
its current form, the Assembly may not concur with
amendments it specifically deleted.
F. Sharpening the Harpoon
The Legislature and other states have tried the
following approaches to compel retailers that lack physical
presence in the state to collect and remit sales and use
taxes.
New York created a presumption that a
retailer solicits sales in the state if an
in-state affiliate is compensated for referring
customers directly or indirectly to the retailer,
stating that "attributional nexis" exists. The
New York Supreme Court upheld this approach, and
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other states have followed, but Amazon has ended
affiliate relationships in those states save New
York. The Legislature approved an attributional
nexus measure in California (SBx3 17, Ducheny,
2009); however, Governor Arnold Schwarzenegger
vetoed the measure.
Colorado requires non-collecting
retailers to notify customers that sales and use
taxes are due on certain purchases, and that the
consumer must file a sales and use tax return.
Failure to provide notice results in a $5
penalty. Non-collecting retailers must also send
consumers an annual notice showing the total
amount of purchases made during the prior
calendar year and inform the consumer of the
obligation to file returns, sent separately by
first-class mail with the marking: "Important Tax
Document Enclosed." Non-collecting retailers
must also file these annual statements with the
Department of Revenue or incur penalties. The
April 5, 2010 version of AB 2078 advanced the
latter half of that approach, with an exemption
for retailers with sales of less than $100,000
annually.
Colorado's legislation also compelled
non-collecting retailers to collect and remit the
sales and use tax if it is part of a controlled
group of corporations with a component member
that is a retailer with physical presence in the
state. The April 5, 2010 version of AB 2078 also
contained a similar provision.
This issue is also under consideration this year in
the Budget Conference Committee, as Senate Budget
Subcommittee #5 acted to incorporate the April 5, 2010
version of AB 2078 as part of its Budget.
G. Amendment Needed
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The Committee may wish to consider amending AB 2078 to
specify that the exemption threshold that relieves a non
use tax collecting firm from the requirement to report
specified information to the BOE applies to a firm's
California sales, not total sales, to ensure that the
measure is more enforceable and that the link between use
tax evasion and the reporting requirement is sufficiently
strong.
Support and Opposition
Support:California State Association of Counties;
Oppose: Direct Marketing Association; Software Finance
and Tax Executive Council; California Chamber of Commerce;
Performance Marketing Association, Inc.; California
taxpayers' Association; Coastal Cardiology; HR Jungle;
TechAmerica
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Consultant: Colin Grinnell