California Assembly Passes I-Tax Law

The California Assembly approved a bill this month that eventually would require companies to collect sales tax on all purchases made in California, either online or in a store, regardless of whether the firms have a physical presence in the state.

The bill, AB 2412, exempts marketers from collecting sales tax if they use a California-based Internet service provider. The assembly voted 41-36, with nine abstentions, to send the measure to the senate.

If passed, the bill would raise an estimated $14 million for California.

Currently, California tax law follows the Quill decision, a 1992 U.S. Supreme Court ruling. The decision requires a company with a physical presence in a state to charge sales tax for everything it sells, including sales via catalog or the Internet. If it does not have a physical presence in the state, then it does not have to charge sales tax.

State Assemblywomen Carole Migden and Dion Aroner sponsored the California bill. Noting that some California-based e-tailers collect sales tax while others do not, Migden and Aroner said the legislation clarifies the situation by making sure that the sales tax law applies equally to bricks-and-mortar, mail-order and Internet sales.

The measure would “clarify that the processing of orders electronically, by fax, telephone, the Internet or other electronic ordering process, does not relieve a retailer of responsibility for collection of the tax from the purchaser if the retailer is engaged in business in this state,” according to the legislation.

The bill is aimed at companies that have set up independent dot-coms, such as Barnes & Noble Inc. The bookseller has stores throughout California, but its Web site,, is a separate unit with no physical presence in California. Therefore, the Web site does not collect sales tax from California buyers because it has no nexus, or physical connection, to the state.

If approved, the measure would not become effective until at least 2001, as a result of the federal Internet Tax Freedom Act. This act, which passed in 1998, prohibits state and local governments from imposing new taxes on Internet access until October 2001 and prohibits multiple or discriminatory taxes on electronic commerce until that time.

The U.S. House of Representatives has passed a measure extending the ban on new, special and discriminatory Internet taxes for five years, until Oct. 21, 2006. The measure eventually will move to the U.S. Senate, where it is likely to face a harder fight.

In addition, several court rulings exempt marketers from collecting taxes from customers in states where the marketers do not have a physical presence.

Roscoe P. Starek III, senior vice president of catalog issues at the Direct Marketing Association, Washington, said he opposes the bill.

“Once again, a state is trying to expand the boundaries of nexus,” he said.

However, there is a strong possibility that the bill would not be passed in California. Gov. Gray Davis is on record as being generally opposed to Internet taxation, and many California high-tech businesses have opposed it.

Even the Clinton administration is advising states against taking any drastic actions on e-commerce.

At a meeting this week of the Computer and Communications Industry Association, Washington, Deputy Secretary of the U.S. Treasury Stuart Eizenstat told attendees that states should move carefully on the sensitive issue of collecting sales tax on Internet transactions to avoid disrupting the development of electronic commerce.

He noted that more than 40 governors were working to simplify differing sales tax rates and definitions of transactions that might be taxable.

“Until we see the results of the states' simplification efforts, we should not change the existing rules regarding sales tax collection which have allowed e-commerce to flourish,” Eizenstat said.

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