BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 234|
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THIRD READING
Bill No: SB 234
Author: Hancock (D)
Amended: As introduced
Vote: 21
SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 3/23/11
AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu
NOES: Huff, Fuller, La Malfa
SENATE APPROPRIATIONS COMMITTEE : 5-3, 4/11/11
AYES: Kehoe, Alquist, Pavley, Price, Steinberg
NOES: Walters, Emmerson, Runner
NO VOTE RECORDED: Lieu
SUBJECT : Board of Equalization: administration: use
tax
SOURCE : Board of Equalization Member Betty Yee
DIGEST : This bill provides that the definition of
retailer engaged in business in this state includes 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.
This bill also alters the definition to provide that the
existing categories of retailers includes, but is not
limited to those in current law. This bill repeals the
inclusion of retailers soliciting orders in a substantial
and existing way, and the exclusion from taking orders over
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a computer telecommunications network that are contingent
on federal actions.
ANALYSIS : 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 United States 274, 97 Supreme Court (Court) 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.
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 BOE. 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.
This bill:
1. Provides that the definition of "retailer engaged in
business in this state" includes any retailer that has
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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.
2. Alters the definition to provide that the existing
categories of retailers includes, but is not limited to,
those in current law.
3. Repeals the inclusion of retailers soliciting orders in
a substantial and existing way, and the exclusion from
taking orders over a computer telecommunications network
that are contingent on federal actions.
Comments
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
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.
This bill implements so-called "long arm" nexus, an
approach which allows the BOE to assert nexus whenever
warranted under the U.S. Constitution. Instead of
providing bright-line tests, this bill allows the BOE to
examine the individual facts and circumstances of a
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particular firm, and impose the collection responsibility
on the retailer if merited by the case law.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Use tax revenue gains unknown potential revenue
increases General
BOE administration likely minor up-front costs
to update General
existing regulation; unknown ongoing
costs
SUPPORT : (Verified 4/12/11)
Board of Equalization Member Betty Yee (source)
California Labor Federation
California Nurses Association
California Retailers Association
California State Association of Counties
California Tax Reform Association
City of Berkeley
OPPOSITION : (Verified 4/12/11)
California Taxpayers Association (Cal-Tax)
Direct Marketing Association
i@Internet Alliance
Performance Marketing Association
TechAmerica
ARGUMENTS IN SUPPORT : According to the author's office,
this bill addresses an inequity in taxation by authorizing
the BOE to the maximum reach of the United States
Constitution to require vendors to be responsible for the
collection and remittance of use taxes, improving
compliance rates and putting brick-and-mortar California
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businesses once again on an even playing field.
ARGUMENTS IN OPPOSITION : Cal-Tax indicates that a "law
that imposes such broad-based nexus on out-of-state online
retailers would substantially diminish the client base of
California web hosts. Instead of selling wares on
California-based web hosts, out-of-state retailers instead
will choose to sell their goods on websites in states that
will not impose a duty to collect sales tax. As California
web hosts lose business to other states, they will be
forced to reduce payroll and investment in California,
resulting in substantial job loss in California's
technology sector."
AGB:do 4/13/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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