CA Senate Shores Up Revenues with Passage of Tax Bill on Online Retailers Like Amazon.com

The California State Senate has passed legislation that requires online retailers like Amazon.com and Overstock.com to collect taxes from its customers as part of a massive government effort to shore up revenues in the face of a $20 billion budget short fall.

By way of background, New York launched the effort with a law that took effect in 2008. North Carolina and Rhode Island have passed similar laws; other proposals have advanced in the statehouses of Virginia, Illinois, Colorado and Hawaii. (See Los Angeles Times, February 20, 2010, pp. AA1 and AA5).

The Democrats who control California’s Legislature plan to put their own bid on the governor’s desk this month in hopes of reaping up to $150 million annually for state and local coffers.

Specifically, the bill requires out-of-state sellers, such as Amazon.com that pay commissions to California firms or residents for sales referrals (often through a website link) to collect use tax on their sales to California residents.  According to a study issued by the State Senate, existing law requires Californians to self-report and pay the use tax on these purchases, but compliance is low.

The bill also strengthens laws related to abusive tax shelters by (a) providing a single definition for such transactions for purposes of the application of several statutes aimed at and curtailing such activity and revising penalty provisions; (b) adopting federal categories for reportable “transactions of interest”; and (c) and revising penalty provisions.  The bill contains contain provisions that permits the state to suspend state occupational and professional licenses because of unpaid income tax liabilities.  The legislation allows taxpayer to avoid suspension by entering into an installment agreement with the Franchise tax Board (“FTB”).

The CA Senate in its legislative analysis found that a contentious issue in sales and use tax administration relates to the extent to which a state may compel an out-of-state retailer to collect use taxes from its in-state customers.  The issue is of considerable importance because, although Californians are required to self-report out-of-state purchases for use in this state, the compliance rate is very low.

In general, an out-of-state retailer must have sufficient business presence (also known as “nexus”) in order to be required to collect and remit the tax.  Under current law, a retailer is considered “engaged in business in this state” and required to collect the California use tax on sales made to California consumers when it maintains storage or warehousing facilities in the state or it has a representative or independent contractor operating in this state for the purpose of selling, delivering, installing, assembling, or the taking of orders for the tangible personal property.

This bill provides that the term “retailer engaged in business in this state” includes any retailer that enters into an agreement with a California business or other entity under which the California entity, for a commission or other consideration, directly or indirectly refers potential customers of tangible personal property.  The referral can be by a link or an Internet website, or some other means, provided that the cumulative sales price from sales by the retailer to customers in California who are referred pursuant to these agreements exceeds $10,000 during the preceding 12 months.

The bill does not apply to advertising on television, radio, in print, on the Internet, or any other medium, unless the payment for advertising consists of a commission or other consideration that is based on sales of tangible personal property.  Thus, banners and “click-throughs” on internet sites, such as Google, which are based on models other than sales commissions for referrals, would not create nexus with California.

The bill now goes to the State Assembly where it is likewise expected to pass.

Also See:

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IRS Issues Guidelines to Parents and Students on College Tax Benefits

Treasury, IRS Issue Proposed Regulations for FATCA Implementation

IRS Issues Guidance to Encourage Small Employers to Check Out Small Business Health Care Tax Credit