California State Assembly to Tax Sales of Out-of-State Internet Companies, But Amazon.com Threatens to Leave California

California Assembly Bill 178 (“AB 178”) seeks to provide a level playing field to ensure that California businesses, both brick and mortar and e-commerce, do not face an unfair competitive disadvantage against out-of-state internet retailers.

California Assemblywoman Nancy Skinner (D–Berkeley) has introduced this legislation that will ensure that California receives its share of sales and use tax revenue from out of state companies to level the playing field for California’s brick and mortar businesses.

Specifically, AB 178 provides that out-of-state companies which maintain a network in California and thus have a presence in the state be required to collect sales tax on orders received from within California.

New York passed a similar law, and was sued by Amazon.com. Skinner patterned her bill, co-sponsored by Assembly Revenue and Taxation Committee Chairman Charles Calderon, D-Montebello, on a law enacted in New York, which defines an Internet retailer’s affiliates within the state as a “physical presence” or “nexus” — the U.S. Supreme Court’s standard on whether a state’s sales taxes apply.

Amazon.com challenged New York’s law, but the New York Supreme Court dismissed Amazon’s claim, based on an extensive body of legal decisions defining the nature of nexus and upheld New York’s right to levy the sales tax.

AB 178 is modeled closely after the New York law and written to conform to the recent New York Supreme Court decision. These taxes are due and payable as use tax, the issue raised in the bill is the point of collection, not the amount of tax owed. The bill exempts businesses doing less than $10,000 in business in the state. AB 178 is expected to raise approximately $55 million in revenue per year.

In response, Seattle-based Amazon.com sent a letter dated June 22, 2009 to Gov. Arnold Schwarzenegger and key California lawmakers warning that if tax legislation there passes, Amazon “would have little choice” but to end its relationship with California advertisers.

In its warning letter, Amazon.com declared that “anticipating imminent enactment of similar legislation in North Carolina, Amazon already has taken steps to close the accounts of North Carolina-based Amazon Associates, and we will no longer pay referral fees after this closure nor will we accept new applications for the Associates program from North Carolina residents.”

“Thus, this provision would provide no new tax revenue collected by Amazon or others who sever their relationships with California-based advertisers, and any revenue estimates should take this into account. And, unfortunately, the approach of AB 178 would deny California-based organizations the advertising fees they currently receive from out-of-state retailers,” Amazon.com added.

The California letter follows similar Amazon.com warnings to Hawaii, North Carolina, Maryland, and Minnesota, which have followed the lead of New York in passing a law establishing that online retailers like Amazon.com have a physical presence in the state through their relationship with locally based affiliates—and are thus required to collect sales tax on items shipped to state residents. Affiliates link to Amazon products in exchange for a cut of sales, and are an important part of Amazon.com’s ecommerce model.

“California instead could heed the direction of the Supreme Court, which said that out-of-state sellers may be required to collect only if states simplify and harmonize their sales tax laws. The well established multistate Streamlined Sales Tax Project (“SSTP”) is the legally-permissible path for states to follow. The approach of AB 178 would undermine the purposes and viability of the streamlining effort and, thus, is opposed by the National Conference of State Legislatures (“NCSL”), the Council on State Taxation (“COST”), and the Business Advisory Council to the SSTP, all of which support SSTP instead,” Amazon.com explained.

The bill is still under deliberation and study by the Assembly Committee on Tax and Revenue.

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