He also signed a bill banning Internet access taxes for three years; however, the bill won't go into effect as it its passage was contingent on the approval of the Net tax bill.
The vetoed bill, AB2412, would have required businesses that operate brick-and-mortar stores within the state and also have online operations to charge taxes to California residents who buy products online.
"AB 2412 singles out companies that are conducting transactions electronically and attempts to impose tax collection obligations on them to which, according to California courts, they are not subject," Davis said in a statement. "In the next 3 to 5 years, however, I believe we should review this matter."
But a sponsor of the bill said Davis' message indicates he missed the point of the bill--to close a loophole.
"Ninety-five percent of state companies that are conducting business online are collecting sales tax on Internet transactions. But a handful of companies are not--and the Governor has this issue completely reversed," said Lenny Goldberg, a lobbyist for the Northern California Bookseller?s Association.
Goldberg said that several companies, such as Barnesandnoble.com and Borders.com, have created subsidiaries outside the state of California for their Internet operations and thus are able to circumvent charging sales tax to California residents.
"(Davis is) giving credibility to (those) that use this manipulative loophole that is illegal under current law, but has not been enforced by the California Board of Equalization," Goldberg said.
The vetoed bill, introduced by state Assemblywoman Carole Migden, was the first proposed legislation to tax Internet purchases based on current tax laws that has reached a governor's desk.
"All this bill does is reaffirm existing laws," said Migden, who added that her office will reintroduce the bill in the next session.
"The vetoed bill allows for certain large retailers to disobey the law and we're not going to stand for it," Migden said.
The other signed bill, introduced by Assemblyman Ted Lempert (D-San Carlos), creates a three-year moratorium on Internet access taxes.
"In order for the Internet to reach its full potential as a marketing medium and job creator, it must be given time to mature," Davis said.
"Imposing sales taxes on Internet transactions at this point in its young life would send the wrong signal about California's international role as the incubator of the dot-com community," Davis said.
Davis signed another bill, introduced by Sen. John Vasconcellos (D-Santa Clara), creating a new California commission to develop a long-term strategy for state and local tax structures related to the Internet.
Lawmakers across the country are wrestling with similar issues regarding taxes on online sales.