CA Internet Tax Would Hit Small Business

JUNE 7, 2011

By KATY GRIMES

Instead of working on making cuts to a growing state government, California lawmakers have been dreaming up new ways to get the state’s residents to pony up more tax money, or “revenue,” as it is called in the offices of elected officials up and down California.

Taxing people who can’t vote against it seems to be the latest legislative trick, as tax increases are not popular with voters and have been voted down time and time again in recent history. Targeting out-of-state businesses seems to be just the latest scheme.

Currently, the state’s Democratic legislators are pushing two bills designed to tax out-of-state online retailers who use websites in California.

Democratic Assemblywoman Nancy Skinner (Berkeley) has authored AB 153, referred to as a “nexus tax.” This bill would specifically force out-of-state online retailers (called “affiliates”) who use websites in the state to collect and remit California sales and use taxes.  The bill targets large online retailers eBay, Amazon and Overstock, which have each threatened to end all affiliate contracts in California should this bill passes.

Businesses without a physical presence in a state, but with customers here, will be required to collect sales and use tax. For any state to subject a vendor to sales and use tax collection obligations, the vendor must have nexus with that state — a connection between the vendor and state such as a physical presence.

Former Republican Senator George Runner, a current member of the Board of Equalization, has warned that if Skinner’s bill passes, “online retailers will terminate their relationships with the nearly 25,000 affiliates currently doing business in California. That’s what they’ve already done in other states that passed such laws, except New York, for purposes of mounting a legal challenge.”

The other online tax bill is SB 234, authored by Democratic Sen. Loni Hancock, also of Berkeley, which enacts a “long arm” nexus. It would allow the Board of Equalization  to force anyone it chooses, regardless of who they are or where they are located, to collect and remit to California sales and use taxes.

Runner says that, while supporters claim the state will earn an additional $150 million in tax revenue, the punitive online tax bills would cut into the $42.2 billion in sales and use tax revenue paid last year in by California businesses, by chasing the online affiliate businesses out of California forever.

The Board of Equalization reported $124 million in state income taxes paid by affiliates in 2009 — an amount which many say has increased since 2009.

Americans For Tax Reform President Grover Norquist warns that what legislators across the country are really doing is setting states up to be able to tax income on out-of-state businesses. “Why California is doing this is unclear,” said Norquist. “So many businesses are already leaving the state.” Norquist said that lawmakers in smaller states have long tried to come up with schemes to tax income on out-of-state businesses. “But, this is time not spent on cutting spending,” said Norquist, who is opposed to much of what lawmakers do, since it does not involve cutting government spending.

And now, many opposed to the bills are warning that California may be tampering with the Commerce Clause in the U.S. Constitution, which gives only the U.S. Congress authority to regulate commerce among the states

Charlie Hollander, a New York diamond seller and online affiliate, does business with both Amazon and eBay. Hollandar explained that the two online retailers do business a little differently. “Amazon invoices the client directly, while eBay requires the seller to invoice and collect. And Amazon pays affiliates directly, minus a commission.” But Hollander said, Amazon deals with American sellers, while eBay has international sellers. “How are eBay sellers going to pay taxes to all of the countries, much less to all of the American states?” asked Hollander.

Other sellers are greatly concerned as well. Loren Bendel of Savings.com, a Texas native who moved to California more than 14 years ago to pursue internet opportunities warned, “If California is not careful, they will actually be creating incentives to start businesses in other states. California is no longer the center of innovation and technology and creative breeding ground. People have other choices now.”

The fight between pro-business and pro-tax advocates appears to be growing more contentious. One would think that any legislation which creates opportunities for more private sector jobs would be championed by both political parties. More jobs means a larger base of taxpayers in the state.

Instead, with single party rule in California, we keep seeing legislation increasing taxes, and bills creating new taxing opportunities within the state. Legislation alleviating regulations or creating opportunities for business are killed almost immediately or during the committee process.

This is the third time internet tax legislation has been introduced in California.

AB 153 was passed by the Assembly 50-21, and is in the Senate.

SB 234 was passed by the Senate 22-17 and is in the Assembly.

Both bills were passed on party lines in the legislative committees, and in both houses of the Legislature.