BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SJR 1 - Ducheny
Amended: April 14, 2009
Hearing: April 22, 2009 Fiscal: Yes
SUMMARY: Urges Congress to support legislation to allow the
states to collect use taxes on products sold over the
Internet.
EXISTING LAW
EXISTING FEDERAL LAW is generally governed by the US
Supreme Court decision Quill Corp. v. North Dakota (1002)
119 L.Ed.2d 91 (Quill) that states that the commerce clause
of the United States Constitution (cl. 3, Sec. 8, Art. I)
Precludes a state from requiring an out-of-state seller to
collect and remit the use tax of that state unless both of
the following apply: (1) the tax is applied to an activity
with a substantial nexus with the taxing state and (2) the
tax is fairly related to the services provided by the
state. See Case Law Discussion in Comment B.
EXISTING STATE LAW imposes the sales and use tax-two
separate and distinct taxes. The sales tax is imposed on
retailers for the privilege of selling tangible personal
property at retail stores in this state and is measured by
the gross receipts of retailers derived from those sales.
The use tax is imposed for the privilege of utilizing
tangible personal property in this state. Specifically,
the use tax is imposed on the storage, use, or other
consumption in this state of tangible personal property
purchased from any retailer. The use tax is imposed on the
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purchaser, and unless that purchaser pays the use tax to a
retailer registered to collect the California use tax, the
purchaser is liable for the tax, unless the use of that
property is specifically exempted or excluded from tax.
The sales and use taxes are the same rate (8 % state wide
plus any additional transactions and use taxes) and are
required to be remitted to the BOE on or before the last
day of the month following the quarterly period in which
the purchase was made. Both the sales and use tax require
that the "retailer be engaged in business in this state."
Provides that sales to Californian's through telephone,
Internet and Mail Order (TICMO) from out-of-state retailers
with no nexus in the state are not subject to sales or use
tax collection by the retailer.
If a retailer has sufficient "business presence," as
defined, that retailer is required to register with the BOE
and collect the applicable use tax on all sales to
California consumers.
THIS BILL
Urges Congress to support legislation to allow the states
to collect use taxes on products sold over the Internet.
Makes findings and declarations about the erosion of the
sales and use tax base in California due to the lack of
collections through electronic commerce.
States that all states could lose as much as $33 billion in
2008 because they were not able to collect the use tax on
remote sales and that California's portion could be as much
as $4 billion.
States that since 1999, 40 states have joined the
streamlined sales and use tax agreement that allows for the
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collection of sales and use taxes.
FISCAL EFFECT:
None
COMMENTS:
A. Purpose of the Bill
According to the author, this bill is a basic fairness
issue-it is now time to level the playing field for those
who claim to be out-of-state remote sellers but who are, in
reality, California brick-and-mortar businesses. "When I
buy a $25 DVD at my local video store, the $2 in sales tax
I pay funds important local services like public safety,
parks and road maintenance. When my neighbor pays $22 for
the same DVD online, pays $3 for shipping, and pays no
sales tax, she still places a demand on local services but
is not doing her part to help fund these services."
Most Californians do not know that they are required to pay
use tax on the $22 DVD they buy from a catalog or online.
Because the state cannot compel an out-of-state retailer to
collect the sales tax for us, the vast majority of use tax
goes uncollected.
B. Case Law
"Nexus" is defined as (1) A means of connection; a link or
tie; (2) A connected series or group. (Webster's
Dictionary) In statute, however, nexus is generally
decided by case law. The following describes case law
relevant to the idea of nexus as it relates to the
collection of the sales and use tax.
In 1967, the Supreme Court ruled in National Bellas Hess,
Inc. v. Illinois Department of Revenue, 386 U.S. 753
(1967), that a firm that has no link to a state except
mailing catalogs to state residents and filling their
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orders by mail cannot be subject to that state's sales or
use tax. The Court ruled that these mail order firms
lacked substantial physical presence, or nexus, required by
the Due Process Clause and the Commerce Clause of the
United States Constitution.
In the 1977 case of Complete Auto Transit, Inc. v. Brady
(1977) 430 U.S. 274 {51 L.Ed.2d 326, 97 S.Ct. 1076} the
court articulated that, in order to survive a Commerce
Clause challenge, a tax must satisfy a four part test: 1)
it must be applied to an activity with a substantial nexus
with the taxing State, 2) it must be fairly apportioned, 3)
it does not discriminate against interstate commerce, and
4) it must be fairly related to the services provided by
the State.
Quill Corporation v. North Dakota (1992) 504 U.S. 298: The
Court in Quill applied the Complete Auto Transit analysis
and held that satisfying due process concerns, as required
by Bellas Hess, does not require a physical presence, but
rather requires only minimum contacts with the taxing
state. Thus when a mail-order business purposefully
directs its activities at residents of the taxing state,
the Due Process Clause does not prohibit the state's
requiring the retailer to collect the state's use tax.
However, the Court held further that physical presence in
the state was required for a business to have a
"substantial nexus" with the taxing state for purposes of
the Commerce Clause. The Court therefore affirmed that in
order to survive a Commerce Clause challenge, a retailer
must have a physical presence in the taxing state before
that state can require the retailer to collect its use tax.
According to legal opinions, the Court in Quill made clear
that the Due Process Clause was not an obstacle to
congressional intervention by bifurcating the concept of
nexus into a due process component and a Commerce Clause
component. Due Process nexus was satisfied in Quill, but
not Commerce Clause nexus. The bifurcation approach
"allowed the Court to preserve the Bellas Hess result,
while paving the way for congressional intervention." In
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that sense, the court narrowed Bellas Hess. The Quill
decision specifically states that congressional action is
necessary, especially given the complexity of the state's
sales taxes, to address the Commerce Clause issues.
(Richard Pomp-What Quill Means)
Current, Inc. v. State Board of Equalization 24 Cal.App.4th
382. In this 1994 decision, the court held that
subdivision (g) of Section 6203 - as it appeared then - was
unconstitutional as it applied to Current, stating that it
placed an impermissible burden on interstate commerce. At
that time, this subdivision defined a "retailer engaged in
business in this state" as "any retailer owned or
controlled by the same interests which own or control any
retailer engaged in business in the same or a similar line
of business in this state."
The most significant aspect of Current was that it sets
forth those factors that would be utilized by a court to
determine whether one retailer is an agent of another. The
factors set forth in Current to determine an agency
relationship are: two entities hold themselves as being
identical or affiliated; share goodwill, trade names, or
marketing practices; or exploit the trade name, corporate
identification, or goodwill of the other.
Current was an out-of-state mail-order company whose
principal place of business was in Colorado. Current had
no employees, inventories, or facilities in California, and
had no other contacts with California until Deluxe
Corporation acquired it as a wholly owned subsidiary.
Deluxe, who maintained its principal place of business in
Minnesota, had a physical presence in California and held a
California seller's permit.
Deluxe was engaged primarily in the manufacture and sale of
checks at wholesale (nearly all its sales - 96.3% - were
checks to financial institutions and their depositors; the
remaining 3.7% of sales consisted of financial forms,
pre-inked hand stamps and checkbook calculators).
Current's principal product lines consisted of greeting
cards, gift wrap and various other novelty items, including
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checks, with an emphasis placed on the creative design of
Current's products. Although Current and Deluxe both
produced checks, only 7.9% of Current's revenue was derived
from check sales. However, neither company held itself out
to customers or potential customers as being the same as,
or an affiliate of, the other. Each had its own trade
name, goodwill, marketing practices and customer lists and
each marketed its products independently of the other.
Neither exploited the trade name, corporate identification
or goodwill of the other or purchased goods or services
from the other. The companies did not have integrated
operations or management, nor was either an alter ego or
agent of the other for any purpose and both operated as
separate and distinct corporate entities. The court relied
upon the federal commerce clause nexus principles set forth
in Quill to hold Current did not have nexus with California
sufficient to justify the imposition of a use tax
collection duty.
The Court also held that the minor overlap with regard to
the sales of checks by both companies was not sufficient to
render the two corporations in "the same or similar line of
business." The court noted that the fact that the two
companies' products were produced by printing was not a
sufficient distinguishing characteristic; it was the
uniqueness of the product itself, coupled with any
distinctive marketing strategy, which was required to pass
the test of similarity under the statute. Further, the
development, design, production, and marketing of Current's
various novelty products were substantially dissimilar from
that of Deluxe, and consequently, there was no basis for
application of the imposition of a use tax collection duty.
C. What is the Streamlined Sales Tax Project (SSTP)?
According to its executive summary, the SSTP is an effort
created by state governments, with input from local
governments and the private sector, to simplify and
modernize sales and use tax collection and administration.
The goal of the project is to develop measures to design,
test and implement a sales and use tax system that
radically simplifies sales and use taxes.
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The Project was organized in March 2000 and conducts its
work through a steering committee made up of co-chairs,
four work groups, and a number of sub-groups. The
participants are mainly state revenue departments, but also
include state legislators, local governments and
businesses.
Support and Opposition
Support:League of California Cities
Oppose:None Received
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Consultant: Gayle Miller