BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 155 HEARING: 7/6/11
AUTHOR: Calderon FISCAL: Yes
VERSION: 5/2/11 TAX LEVY: No
CONSULTANT: Miller
USE TAX: RETAILER ENGAGED IN BUSINESS
Partially reenacts current law as it relates to "retailer
engaged in business" in this state.
Background and Existing Law
Federal Law
The 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."
The United States Supreme Court has issued several
decisions interpreting these parts of the Constitution to
guide states seeking to tax firms engaged in multistate
commerce. 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
nexus, 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 and use taxes.
Initially, the Court provided that a firm did not require
physical presence to trigger nexus. A firm having
employees or independent contractors is enough to trigger
the use tax collection requirement, thereby creating the
theory of "agency nexus" in Scripto, Inc. v. Carson, 362
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U.S. 207 (1960). Seven year later, the Court clarified
that states could not compel collection of the use tax from
a firm that only shipped into a state by mail or common
carrier in National Bellas Hess v. Department of Revenue,
386 U.S. 753 (1967). The Court subsequently refined its
view of use tax nexus in Quill Corp. v. North Dakota, 504
U.S. 278 (1992), relying on National Bellas Hess, holding
that states compelling retailers without physical presence
in the state to collect and remit use taxes complied with
the Due Process Clause, but violated the Commerce Clause.
In Quill, the Court found that North Dakota's statute
compelling a vendor with no physical presence but who
advertises three times in a single year or makes three
phone calls soliciting sales in the state to collect use
taxes unduly burdens interstate commerce. Quill bars
states from forcing retailers that lack physical presence
in a state to collect the use tax, although recent efforts
are challenging this standard (see Comment 5).
State Law
State law imposes the sales tax on 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. Unless
the person pays the sales tax to the retailer, he or she is
liable for the use tax, which is imposed on any person
consuming tangible personal property in the state. 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 online, by mail order, or on a trip
to another state, the obligation rests on the consumer to
remit the use tax due. Californians may remit the use tax
on the income tax form (SB 858, Committee on Budget, 2010),
after a similar provision sunset after the 2009 taxable
year (SB 1009, Alpert, 2003).
The Sales and Use Tax Law defines a "retailer engaged in
business in this state" as:
Any retailer entering into an agreement with a
resident of this state under which the resident, for a
commission or other consideration, directly or
indirectly refers potential customers of tangible
personal property, whether by a link or an Internet
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Web site or otherwise, to the retailer, if the
cumulative gross receipts or sales price from sales by
the retailer to customers in this state who are
referred pursuant to these agreements is in excess
$10,000 during the preceding four calendar quarterly
periods. (ABX1 28, Blumenfield, 2011)
Any retailer that is a member of a commonly
controlled group, as defined under the Corporation Tax
Law, and a member of a combined reporting group, as
defined, 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.
(ABX1 28, Blumenfield, 2011)
Any retailer that has substantial nexus in this
state for purposes of the commerce clause of the
United States Constitution, and any retailer upon whom
federal law permits the state to impose a use tax
collection duty. (ABX1 28, Blumenfield, 2011)
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
delivering, installing, assembling, or the taking of
orders for any tangible personal property
Any retailer that derives rental income from leases
within the state.
The definition of a "retailer engaged in business in this
state" also includes retailers soliciting orders in a
substantial and recurring way, and that benefits from any
banking, financing, debt collection, telecommunication or
marketing activities in the state, or that benefit from the
location of authorized installation, servicing, or repair
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facilities. However, this definition is contingent upon
Congress acting to allow the state to collect sales and use
taxes from out-of-state retailers (AB 72, Klehs, 1994). AB
72 also expressly excluded from the definition taking
orders from customers in the state from a computer
telecommunications network which is not directly or
indirectly owned by the retailer. However, this exclusion
is inoperative if Congress acts to allow the state to
collect sales and use taxes from out-of-state retailers.
Proposed Law
Assembly Bill 155 reenacts part of current law by stating
that a "retailer engaged in business in this state"
includes any retailer that is a member of a commonly
controlled group, as defined under the Corporation Tax Law,
and a member of a combined reporting group, as defined,
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.
State Revenue Impact
The BOE estimates that AB 155 will generate at least $83
million annually in increased revenue.
AB 155 -- 5/2/11 -- Page 5
Comments
1. Purpose of the bill . This bill reenacts provisions of
ABX1 28 (Blumenfield, 2011) which the Governor signed and
became immediately effective on June 29, 2011. According
to the author, 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. 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.
2. We are family . Assembly Bill 155, 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 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, would fit 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 website. 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
AB 155 -- 5/2/11 -- Page 6
featured in visual entertainment media. This bill,
consistent with existing law, would specify 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.
3. #winning all the time . On June 29th, Governor Brown
signed AB 1X 28 (Blumenfield) which the identical
provisions to AB 155 as well as the provisions of AB 153
(Skinner) and SB 234 (Hancock). The Committee may wish to
consider the wisdom of advancing a bill that is already
law.
4. Numbers Matter . The BOE provides the following
rational for its revenue estimate of AB 155: Assuming that
Amazon or other companies do not change their corporate
structure or discontinue their use of in-state companies,
or otherwise have a change in behavior, the revenues
associated with Amazon's sales to California consumers
alone would amount to an estimated state and local use tax
increase of $83 million annually. This amount was derived
by using published Internet retailer transaction data.
We have no information that would reveal other out-of-state
retailers that are similarly structured to determine any
further revenue impact. However, this does not necessarily
mean that there are no other companies that are similarly
structured that could be impacted by this provision. In
addition, there could be an unknown delay of revenues due
to potential litigation.
Assembly Actions
Assembly Revenue and Taxation Committee: 5-2
Assembly Appropriations Committee: 12-5
Assembly Floor: 52-20
Support and Opposition (6/30/11)
Support : Alicante Group; American Federation of State,
AB 155 -- 5/2/11 -- Page 7
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; 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; Kim's Alterations; Latino Times/former
Chair California Hispanic Chamber of commerce; Leach
Housekeeping; Lisa Norman Lingerie; Lopez Landscape; "M" is
for Mystery?and more; Magic Moments Portraits; Main Farms;
MARTtoMART; Michelle Marie's Caf�, LLC; Mohr Clocks;
Momma's Closet; Montana EyecareMontana NaturalMs. Fits
Consignments; Namedroppers; Natural Health Center; Nelson's
Drug Store; Neufelds Promenade; 99 Cent and Plus; Northern
California Independent Booksellers Association; N.V.me
Fashions; Origano Restaurant; Periwinkle; Phariss Tax
Service; Planet Videos and More; Postnet; Professional &
Technical Engineers, Local 21; Repeat Performance; Pulp
Studio; Punk Bananas Thrifty Store; Quesenberrys Pharmacy;
Ray Main Sales; Reid hardware; Relles Florist; Rick's
Furniture; Sake House Yumeya LLC; San Diego Trading
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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;
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; Tower Hydro; The Whistle Stop;
Tina's One Stop Shop; Tom Stallard, Woodland City Council
Member; 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; 9 individuals
Opposition: California Taxpayers Association; Direct
Marketing Association; Howard Jarvis Taxpayers Association;
Internet Alliance; Performance Marketing Association