California lawmakers OK Net sales tax bill

The bill, AB2412, which was introduced by state Assemblywoman Carole Migden in February, is being reviewed by the California Assembly today after it passed the Senate yesterday by a majority vote. After its review, the bill is expected to land on Gov. Gray Davis' desk by next week.

Gartner analyst French Caldwell says that although California's governor may still veto the Internet tax bill coming to his desk, the bill may be the opening salvo on the federal moratorium on new Internet taxes. see commentary

If the bill is signed, it would represent the first legislation to tax Internet purchases based on current tax laws. Lawmakers across the country are wrestling with similar issues regarding taxes on online sales.

Because of California's status as the most populous state in the nation and because of its high number of Internet users, the bill could set a precedent for other states.

The bill targets retailers that operate brick-and-mortar stores within the state and also have online operations. If it becomes law, these retailers would be required to charge taxes to California residents who make online purchases.

Currently, some retailers with stores located in California--such as Barnesandnoble.com and Borders.com--do not tack taxes to online purchases made by the state's residents.

"Most companies that have a retail presence in California charge state sales taxes through their Internet operations, but some are egregiously flaunting the law by not charging taxes," said Lenny Goldman, a lobbyist for the Northern California Bookseller's Association, which is a sponsor of the bill.

The legislation, which could mean tens of millions of dollars in tax revenue for the state, clarifies state law regarding the taxation of Internet purchases. It seeks to give California retailers tax equality by affirming that e-tailers operating brick-and mortar stores in the state are subject to the same sales tax requirements regardless of whether a service or product is sold in a store or online.

"This makes it clear that such tax evasions will not be tolerated. It's really basic fairness, and we appreciate that the legislature has recognized that," Goldman said.

Opponents of the legislation say it will harm current efforts to block Internet taxation.

"Since the Internet got to be a commercial force in California, this is the first time that California policy-makers have attempted to offer new tax obligations on the Internet and in effect tax the Internet," said Dean Andal, chairman of the California Board of Equalization, who is opposed to the bill.

"Since the early 1990s there has been a bipartisan agreement that the Internet should not be taxed...because of the economic growth potential it has for our state," he said. "That has worked to an incredible degree as you can tell by Silicon Valley's prominence."

Andal said he will urge Davis to veto the bill. Representatives from Davis' office said the governor has not made a decision on the issue, but that he historically has been opposed to Internet taxation.

In May, the California Assembly narrowly approved the tax measure. Many high-tech businesses in the state have also opposed the bill.

While most California retailers collect taxes online, some retailers that have created out-of-state subsidiaries for their Internet divisions claim exemption from state tax laws. These laws do not require businesses to charge sales tax unless they have a physical presence, or "nexus," in the state where the purchase is made.

The proposed legislation would require online companies with a brick-and-mortar store or warehouse in the state to charge state taxes.

Brick-and-mortar stores Barnes & Noble, Borders and Sam Goody are among those that operate in California and have created subsidiaries outside the state for their Internet divisions. If the bill is passed, they will be affected.

Many independent booksellers that say they feel that tax-free books sold online undercut their in-store sales see the proposed legislation as a coup.

"This is just sending a message to the California Board of Equalization that they ought to be enforcing state tax laws against these corporate law-breakers," said Andy Ross, owner of Cody's Bookstore in Berkeley, Calif.

Many say that these retailers are not charging taxes online because of a loophole in the current law, which this bill seeks to amend. Ross said the California Board of Equalization has been reluctant to enforce the state tax laws against these companies because that would be a signal that they are promoting Internet taxation.

"But the tax laws should be applied even-handedly. Does Barnes & Noble have any less of a presence in California than Cody's?" Ross said.

Nevertheless, the legislation could improve efforts to tax online sales nationwide.

"If more companies are forced to collect sales tax online while a select few online-only retailers are exempted, support will build for a level playing field so that all retailers will have the same sales tax collection responsibilities," said Tripp Funderburk, a spokesman for the e-Fairness Coalition, a group that is pressing Congress to require sellers such as Amazon.com to collect sales tax on all their transactions.