BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
2078 (Calderon)
Hearing Date: 08/02/2010 Amended: 06/24/2010
Consultant: Mark McKenzie Policy Vote: Rev&Tax 3-2
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BILL SUMMARY: AB 2078 would make the following changes designed
to increase use tax collections:
Create a rebuttable presumption that a company qualifies as a
retailer engaged in business in this state if it is part of a
controlled group of corporations that has a component member
that is a California retailer.
Require each retailer that is not required to collect and
remit use tax to provide information on its web site or
catalogue that the purchaser is required to pay the use tax on
the storage, use, or consumption of tangible personal property
in this state.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Use tax collections unknown potential increase in use tax
General/
revenues (see staff comments) Local
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STAFF COMMENTS: Existing state law imposes a use tax on the
storage, use, or consumption in this state of tangible personal
property purchased from any retailer. The tax is imposed on the
purchaser, and unless the purchaser pays the use tax to a
retailer registered with the Board of Equalization (BOE) to
collect and remit the tax, the purchaser is liable for paying
the use tax. Existing law defines a "retailer engaging in
business in this state" for purposes of sales and use tax
collection obligations as: (1) a retailer that has a physical
"bricks and mortar" presence, as specified, either on temporary
or permanent basis, directly or indirectly, or through a
subsidiary or affiliate; (2) a retailer with any representation
(agents, salespersons, etc) under the authority of the retailer
or a subsidiary for purposes of delivering, installing,
assembling, or the taking of orders for any tangible personal
property; and (3) a retailer that derives rental income from
leases within the state.
Federal law, the U.S. Constitution's Commerce Clause, generally
prohibits states from enacting legislation that improperly
burdens or discriminates against interstate commerce. The
question of whether states can compel remote retailers to
collect the use tax has been the subject of extensive
disagreement and litigation. For instance, under 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 if the taxpayer has nexus, the tax is fairly
apportioned and non-discriminatory, and a fair relationship
exists between the tax and the services provided must. The
Court clearly stated that its holding applied to income taxes,
franchise taxes, and sales taxes.
The Court subsequently refined its view of nexus 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
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AB 2078 (Calderon)
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. In
addition, Current, Inc. v. State Board of Equalization, 24
Cal.Appt.4th 382 (1994) affirmed a trial court decision that the
imposition of the use tax on an out-of-state mail order company
was invalid under the Commerce Clause, and that the company was
not rendered liable for the tax by its acquisition by another
company.
AB 2078 would attempt to compel the collection and reporting of
use tax by more retailers by creating a rebuttable presumption
that a company qualifies as a retailer engaged in business in
this state if it is part of a controlled group of corporations
that has a component member that is a California retailer. The
bill would also require retailers that are not required to
collect and remit use taxes to provide a notice on its website
or catalogues informing consumers of their obligation to pay the
use tax.
Other states have also attempted 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 nexus" exists. The
Legislature approved an attributional nexus measure in
California (SBx3 17, Ducheny, 2009), but 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, with failure to comply subject
to penalties. 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. AB 2078 contains a similar provision. The Colorado
legislation is currently in litigation, and staff notes that
this bill is also likely to be challenged in court.
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 post a notice on its website.
It is unknown how many out-of-state retailers would comply with
the requirements of the bill, or how many California consumers
would voluntarily report the use tax as a direct result of a
retailer complying with the notice requirements in this bill.
To the extent compliance with this bill is achieved, state and
local revenues could increase. BOE notes that annual revenue
losses related to unreported use taxes is over $1 billion,
approximately $600 million of which is related to consumer
purchases and $485 million related to business-to-business
transactions. BOE estimates that this bill could result in a
state and local revenue gain of about $590,000 related to
consumer purchases, if five percent of business-to-consumer
sales are reported.