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Monday, January 24, 2011

California proposal (AB 153) for expanded sales/use tax nexus

Legislation has been introduced in California again to try to improve collection of use tax, such as what is owed on many Internet purchases of tangible personal property. AB 153 follows the New York approach enacted in April 2008. It would add the following to R&T Section 6203(c) on retailer engaged in business in this state:

"(5)(A) Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise, provided that the total cumulative sales price from all of the retailer's sales, within the preceding 12 months, of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, is in excess of ten thousand dollars ($10,000).
(B) This paragraph shall not apply if the retailer can demonstrate that the person in this state with whom the retailer has an agreement did not engage in referrals in the state on behalf of the
retailer that would satisfy the requirements of the commerce clause of the United States Constitution.
(C) An agreement under which a retailer purchases advertisements from a person or persons in this state, to be delivered on television, radio, in print, on the Internet, or by any other medium, is not an agreement described in subparagraph (A), unless the advertisement revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon sales of tangible personal property."

The constitutionality of this approach is still being examined by the courts in New York. Meanwhile, two states that adopted it - Rhode Island and North Carolina, saw that big vendors, such as Amazon, who would be subject to the collection, canceled the agreements with in-state associates such that they are no longer subject to the law.

It is unfortunate to see lawmakers spending time on this approach to use tax collection when it is so easy for those who it is trying to reach, to avoid that reach. Instead, lawmakers could be:
  1. Working with the Congress and the Streamlined Sales and Use Tax group to modify California and federal law to allow states with simplified sales tax regimes to collect sales tax from remote vendors within the bounds of the commerce clause. (See H.R. 5660 (111th Congress).)
  2. Educated consumers, such as their own constituents, about the existence of the use tax and the importance of taking the time to figure out what they owe and reporting it on their Form 540. They can remind constituents about our budget shortfall, that paying the use tax might avoid the need for increasing other taxes, and that it is easy to report it on their Form 540. I'd like to hear lawmakers telling people that they themselves are compliant with their use tax obligations.
  3. Changing the law to allow taxpayers the choice of either keeping records to determine how much use tax they owe or using a table amount where they estimate it based on their income level + add to it use tax on purchases costing over $1,000. For example, see page 81 of the New York individual tax return instructions - here.
AB 153 is intended to increase revenue and could do so it vendors subject to it did not cancel associate agreements so they are not subject to it. But, since it is just shifting collection of the use tax from the customer to the vendor, it is not a tax increase and so should be passable with a majority vote. In fact, a similar bill passed in the legislature before and Governor Schwarzenegger vetoed it. In that July 2009 veto, he demonstrated the low understanding of the use tax - even by the chief tax collector for the state (the governor) by saying there was no need for tax increase given recent tax increases already passed! (Collecting the use tax is not a tax increase - the tax has been on the California books since the 1930s.) Click here for the July 2009 statement about the use tax.

Changing the law to allow the option of computing the use tax using a table should also not require a 2/3 vote because the use tax is already on the books - it would just allow for a simpler technique for individuals to calculate their use tax liability.

We'll see what happens!

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