California BOE Announces Next Steps in Enforcement of On-Line Retailer Tax Law as State Prepares for Possible Referendum against It

The California Board of Equalization (BOE) has announced the next steps in enforcing ABx1 28, the measure passed by the Legislature and signed into law by the Governor on June 28, 2011. The law establishes use tax collection obligations on out-of-state retailers.

Under ABx1 28, out-of-state online retailers who meet the criteria must register with the BOE and collect and remit the use tax. If the out-of-state retailers refuse to comply with the law, the BOE, in accordance with Article 3, Section 3.5 of the California Constitution, is obligated to enforce the law.

Passage of the law, which the California legislature projects will help California collect an additional $200 million annually, adds California to a growing list of states that have turned to such measures in hopes of bringing in more revenue, and leveling the playing field for business. The BOE has estimated that purchases from out-of-state retailers results in approximately $1.1 billion in unreported use tax, according to Jerome E. Horton, Chairman of the BOE.

Under Article 3, Section 3.5 of the California Constitution, agencies like the BOE do not have the power to declare a statute unenforceable, or refuse to enforce a statute, on the basis of it being unconstitutional, unless an appellate court or a referendum by the people has made a determination that such is the case.

“We are actively providing retailers information so that they have a clear direction regarding their new responsibilities.” Horton said. “We will engage in the necessary steps to ensure that the affected retailers collect and remit the use taxes owed to the State of California.”

The BOE will have its first indication of non-compliance on October 31, 2011 when the third quarter of 2011 returns are due and payable. At that time, the BOE may begin issuing estimated billings to retailers who are required under the law to report and remit the use tax collected, but fail to comply.

Amazon has argued that the law is unconstitutional and wants California voters to decide whether to overturn the new law. “This will likely set the stage for a potentially high-dollar ballot fight next year that would pit business against business,” said Horton.

A petition for a referendum was filed in early July with the state Attorney General’s Office, which could eventually require voters to decide on the new law. Amazon also has an option of challenging the law in court.

In this regard, the State Attorney General has prepared the following title and summary of the chief purpose and points of the proposed measure: “Referendum to Overturn Law Requiring Internet Retailers to Collect Same Sales or Use taxes as other Retailers.”

“If signed by the required number of registered voters and filed with the Secretary of State, this petition will place on the statewide ballot a challenge to an existing state law. The law must be approved by voters at the next statewide election to remain in effect. The law expands the definition of retailers considered ‘engaged in business’ in California to include certain Internet retailers selling to California consumers, so that out-of-state Internet retailers also collect existing sales or use taxes,” the Attorney General’s Office explained.

Once the public learns that non-California companies who currently fail to comply with the law and play by the rules are costing California approximately $12.5 billion in sales and $1.1 billion in use taxes which translates into 37,000 jobs, $52 million in property taxes, and $48 million in income taxes, Californians will potentially reject the referendum,” said Horton.

Chairman Horton believes that the court of public opinion and the law of free trade will ultimately make the final determination of the winners and losers under ABx1 28 and Amazon will lose in the court of law.

“Amazon has also canceled all of its California based affiliates,” Horton pointed out. “This has caused some confusion and questions about customer loyalty. Will the California consumers wait until these legal and political differences are resolved? If not, market share and free trade will govern the day.”

Chairman Horton believes that California retailers have a window of opportunity to convince California consumers to buy from them online or in their local California base stores due to this action by Amazon. In addition, he believes that the affiliates may decide to associate with out-of-state or California based retailers willing to comply with the new law.

“Ultimately, until the public via a referendum, or the courts tell us otherwise, the Board of Equalization will enforce ABx1 28,” said Horton.

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