California Gov. Gray Davis this week vetoed a bill, opposed by most direct marketers, that would have required Internet retailers to collect taxes on their sales even if the retailer had no physical presence in the state.
The bill, A.B. 2412, was sponsored by state Assemblywomen Carole Migden and Dion Aroner. The measure would have “clarified 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.
Migden said the legislation was intended to “level the playing field” among California retailers.
Davis received the bill Aug. 30 and vetoed it Sept. 25. Davis was expected to veto the bill because he was on record as being generally opposed to Internet taxation, and many California hi-tech businesses have opposed it.
The bill was 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, BarnesandNoble.com, is a separate unit without physical presence in the state. 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 have become effective until at least 2001 as a result of the federal Internet Tax Freedom Act. That law, passed in 1998, prohibits state and local governments from imposing new taxes on Internet access until October 2001. It also prohibits multiple or discriminatory taxes on electronic commerce until that time.
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. In addition, several court rulings exempt marketers from collecting taxes from customers in states where the marketers do not have a physical presence.
The Direct Marketing Association opposed the bill and said California was trying to expand the boundaries of nexus.
Dean Andal, chairman of the state Board of Equalization and member of the U.S. Advisory Commission on Electronic Commerce, who also is an opponent, said A.B. 2412 “conflicts with well-settled U.S Supreme Court decision regarding taxation of interstate commerce. … A.B. 2412 is a significant and unconstitutional expansion of state taxing authority outside of California's territorial limits.”
If the bill had been signed, opponents said, it also would have set a strong nationwide precedent for Internet taxation.