BILL ANALYSIS Ó
AB 155
Page A
Date of Hearing: April 4, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 155 (Charles Calderon) - As Amended: March 3, 2011
Majority vote. Fiscal committee.
SUBJECT : Use tax: retailer engaged in business
SUMMARY : Expands the statutory definition of a "retailer
engaged in business in this state" to improve administration of
the state's use tax. Specifically, this bill :
1)Imposes a use tax collection obligation on any retailer that
is a member of a commonly controlled group, as defined, and is
a member of a combined reporting group, as defined, that
includes another member of the retailer's commonly controlled
group that performs services in this state in connection with
tangible personal property (TPP) to be sold by the retailer.
Qualifying services include, without limitation, the design
and development of TPP sold by the retailer, or the
solicitation of sales of TPP on the retailer's behalf.
2)Deletes the statutory provisions that would, upon the
enactment of authorizing federal legislation, impose a use tax
collection obligation on any retailer soliciting orders for
TPP by mail if the solicitations are substantial and recurring
and if other specified conditions are met.
EXISTING FEDERAL LAW :
1)Authorizes Congress, under the commerce clause of the United
States (U.S.) Constitution, to regulate commerce with foreign
nations, and among the several states. The U.S. Supreme Court
has held that the "negative" or "dormant" commerce clause also
prohibits states from enacting laws that unduly burden or
discriminate against interstate commerce.
2)Provides per federal case law that, under the dormant commerce
clause, a retailer must have a "physical presence" in a state
before that state can require the retailer to collect its use
tax.
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EXISTING STATE LAW :
1)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must be remitted to the
State Board of Equalization (BOE).
3)Specifies those retailers that are considered to be engaged in
business in this state and that, as such, are required to
collect use tax on sales of TPP to California consumers.
Specifically, the term "retailer engaged in business in this
state" includes any retailer who:
a) Maintains, occupies, or uses, permanently or
temporarily, directly or indirectly, or through a
subsidiary, or agent, by whatever name called, an office,
place of distribution, sales or sample room or place,
warehouse or storage place, or other place of business;
b) Has any representative, agent, salesperson, canvasser,
independent contractor, or solicitor operating in this
state under the authority of the retailer or its subsidiary
for the purpose of selling, delivering, installing,
assembling, or the taking of orders for any TPP; or,
c) Derives rentals from a lease of TPP situated in this
state.
4)Defines a "commonly controlled group" as any of the following:
a) A parent corporation and any one or more corporations or
chains of corporations, connected through stock ownership
(or constructive ownership) with the parent, as specified;
b) Any two or more corporations, if stock representing more
than 50% of the corporations' voting power is owned by the
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same person;
c) Any two or more corporations that constitute stapled
entities, as defined; or,
d) Any two or more corporations, all of whose stock
representing more than 50% of the corporations' voting
power is cumulatively owned by, or for the benefit of,
members of the same family.
FISCAL EFFECT : This bill would impose a use tax collection
obligation on Amazon.com LLC (the on-line retailer) and other
similarly organized remote vendors. Looking only at Amazon.com
LLC's sales to California consumers, BOE estimates that this
bill would increase state and local revenues by $83 million
annually. This figure does not include revenues associated with
other as yet unidentified retailers that could be impacted by
this bill.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Each year, California loses over $1.145 billion in revenues
as a result of unreported use taxes. A large percentage of
this use tax gap is attributable to out-of-state Internet
sales. More importantly, the lack of use tax collection
has provided a competitive advantage to many out-of-state
companies, allowing them to undercut their in-state
competitors. AB 155 would help to level the playing field
by imposing a use tax collection obligation on retailers
that use in-state sister companies to help develop or sell
their goods. By taking this important step, AB 155 will
promote the fair and effective administration of
California's Sales and Use Tax Law.
2)Proponents state, "ÝAB 155] is a pragmatic and thoughtful
approach that strikes the appropriate balance between the
state's need to close the use tax gap while also protecting
California's burgeoning high tech industry from any adverse
impacts." Proponents also state, "We believe that ÝAB 155],
though novel, is also fair, practicable and enforceable by
focusing on the corporate family relationship of a parent and
subsidiary working in concert with one another, rather than
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the mere contractual relationship that exists between an
affiliate marketer and the company it advertises on the behalf
of."
3)Opponents state, "ÝW]e oppose AB 155 because the California
courts have already rejected "control group nexus" as a basis
to require out of state retailers to collect use tax.
Moreover, even if AB 155 could be enforced, such a requirement
would not produce additional revenue for California as related
companies can easily be relocated, or the services they
provide can easily be obtained elsewhere." Opponents also
state, "Instead of AB 155, we encourage the Legislature to
consider expanding California's existing, lawful and
successful program to collect use tax from the purchasers who
are responsible for payment."
4)BOE has provided the following comments in its staff analysis
of this bill:
a) This Bill would impose a use tax collection obligation
on retailers such as Amazon.com LLC, the on-line retailer
and others . "This bill would impose a use tax collection
obligation on out-of-state retailers who have certain
sister companies in California that perform services in
cooperation with the out-of-state retailer, as described.
Amazon.com LLC (the on-line retailer), for example, and any
other similarly organized out-of-state retailer, would fit
within this provision. Amazon.com Inc. is a Seattle-based
corporation. The on-line retailer, Amazon.com LLC, is a
member of Amazon.com Inc.'s commonly controlled group and a
member of Amazon.com Inc.'s combined reporting group under
California's Corporation Tax Law. Amazon.com LLC's
commonly controlled group has other California-based
members that perform various services in this state in
connection with items sold by Amazon.com LLC. For example,
A9.com is a California-based wholly-owned subsidiary of
Amazon.com, Inc. and provides product and visual search
technologies for items displayed on Amazon.com LLC's
website. Another California wholly-owned subsidiary, Lab
126, performs design and development activities associated
with Amazon's Kindle and other electronic reading devices.
This change to Section 6203 would specify that such
described out-of-state retailers are engaged in business in
California, based on the activities of their other members
of their commonly controlled group, and are required to
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collect California use tax on their taxable sales to
California consumers. This specific form of nexus has not
been reviewed by the U.S. Supreme Court, but it does raise
a question regarding whether it would be consistent with
the "physical presence" test affirmed in Quill.
Ultimately, the physical presence requirement for nexus may
have to be reexamined by the court to reflect today's
marketplace."
5)Committee Staff Comments:
a) California's Use Tax : Since 1933, the state has imposed
a sales tax on California retailers for the privilege of
selling TPP, absent a specific exemption. The tax is based
upon the retailer's gross receipts from TPP sales in this
state. In 1935, California adopted a complementary "use
tax" on the storage, use, or other consumption of TPP
purchased out-of-state and brought into California. The
use tax was designed to protect California merchants who
would otherwise be at a competitive disadvantage when
out-of-state retailers sell to California customers without
charging tax.
Unlike the sales tax, the use tax is imposed on the
purchaser and not the retailer. Unless the purchaser pays
the use tax to an out-of-state retailer registered to
collect California's use tax, the purchaser remains liable
for the tax. The use tax is set at the same rate as the
state's sales tax and must be remitted to the BOE.
b) Impediments to Collection : The most practical way for a
state to enforce its use tax is to have retailers collect
the tax at the time of sale. However, there is
considerable ambiguity surrounding the circumstances under
which a state may legally compel an out-of-state retailer
to collect use tax on its behalf. This ambiguity has its
origins in the commerce clause of the U.S. Constitution,
which charges Congress with regulating commerce among the
several states. The U.S. Supreme Court has held that, by
implication, the commerce clause also prohibits states from
enacting laws that unduly burden interstate commerce.
In Quill Corp. v. North Dakota (1992), 504 U.S. 298, the
U.S. Supreme Court was asked to decide the
constitutionality of a North Dakota law that imposed a use
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tax collection obligation on out-of-state retailers that
advertised in the state three or more times in a single
year. The Court invalidated the law, holding that, under
the negative Commerce Clause, a retailer must have a
"physical presence" in a state before that state can
require the retailer to collect its use tax.
The "physical presence" test affirmed in Quill has
complicated California's efforts to collect its use tax.
For example, when a California consumer purchases a coat
from an out-of-state retailer through its catalog or online
store, the consumer's use of the coat in California
triggers a use tax liability. If the out-of-state retailer
lacks a "physical presence" in California, however,
California is constitutionally prohibited from requiring
the retailer to collect the tax. If the consumer fails to
remit the tax, the purchase completely escapes taxation.
It is estimated that this gap in California's sales and use
tax (SUT) system costs the state over $1.145 billion in
revenues each year.<1>
c) Proposals for Increasing Use Tax Compliance : Other
states have employed a host of different methods for
closing the use tax gap. Most notable are the "Amazon"
approach first adopted by New York, and the approach taken
more recently by the State of Colorado.
i) The "Amazon" Approach : Revenue and Taxation Code
(R&TC) Section 6203 specifies those retailers considered
to be engaged in business in this state - in other words,
it lists those retailers that are considered to have a
"physical presence" sufficient to impose a use tax
collection obligation. AB 153 (Skinner), of the current
Legislative Session, would add to this statutory list
certain "out-of-state" retailers that use California
residents, often referred to as "affiliates," to promote
business. AB 153 is modeled after the so-called "Amazon"
legislation passed in New York. New York, and other
states that have enacted similar bills, argue that if a
remote vendor (like Amazon) uses an affiliate marketing
program, the vendor's in-state activities satisfy Quill 's
physical presence requirements and thus create SUT nexus
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<1> This total represents $795 million in use taxes uncollected
from California consumers and $350 million in use taxes
uncollected from businesses.
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for the vendor. Specifically, this argument is based on
the theory of "attributional" nexus, as established in
Scripto, Inc. v. Carson (1960), 362 U.S. 207 and Tyler
Pipe Indus. v. Washington State Dep't of Revenue (1987),
483 U.S. 232, which hold that if a retailer has in-state
agents that sell on the retailer's behalf, the in-state
agents may establish nexus on behalf of the out-of-state
retailer.
Proponents of the Amazon approach note that many
out-of-state retailers use California residents to drive
business, and take full advantage of California's
consumer base, but refuse to collect California's use
tax. <2> This, in turn, places these companies at a
competitive advantage vis-à-vis California-based
businesses, which must collect and remit sales tax.
Opponents of the Amazon approach argue that such
legislation would cause out-of-state retailers to
terminate their affiliate relationships with California
residents. This, they argue, would place the jobs of
California affiliates at risk in an already troubled
economic climate. In addition, critics argue that
affiliates operate far differently from the sales force
"actively engaged" on behalf of Scripto, Inc.
Specifically, they note that the work of most affiliates
is passive and that affiliates do not call on customers
or directly solicit orders.
It should be noted that out-of-state retailers have
followed through on their threats to terminate affiliate
contracts in states that have adopted Amazon legislation.
After New York's enactment of its "Amazon" law, both
North Carolina and Rhode Island followed suit. As a
result, online giant Overstock.com cancelled its
affiliate program in all three states, while Amazon.com
cancelled its affiliate programs in both North Carolina
------------------------
<2> Amazon collects tax in only five states: Washington, North
Dakota, Kentucky, Kansas, and New York. Indeed, it would seem
that tax avoidance has been a longstanding priority for Amazon,
Inc. founder Jeff Bezos, who originally considered citing his
company on an Indian reservation near San Francisco for tax
avoidance purposes. ("Sorry, Shoppers, but Why Can't Amazon
Collect More Tax?," Randall Stross, New York Times, December 26,
2009).
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and Rhode Island.
ii) The "Colorado" Approach : In its effort to increase
use tax collections, the State of Colorado has taken a
different path from the one forged by New York. On
February 24, 2010, Colorado Governor Bill Ritter signed
into law HB 1193, which imposes a set of notice and
reporting requirements on retailers that do not collect
the state's use tax. Specifically, under HB 1193,
non-collecting retailers must:
(1) Notify consumers that SUT is due on certain
purchases and that, under state law, the consumer must
file a SUT return. Absent reasonable cause, failure
to provide this notice will result in a penalty of $5
for each failure;
(2) Send consumers an annual notice showing the
total amount of purchases made in the prior calendar
year. In addition, the notice must inform consumers
of their obligation to file appropriate SUT returns.
The notice must be sent separately by first class mail
with the marking, "Important Tax Document Enclosed."
Absent reasonable cause, failure to provide this
notice will result in a penalty of $10 for each
failure; and,
(3) File an annual statement for each consumer
with the state's Department of Revenue showing the
total amount paid for purchases during the preceding
calendar year. Absent reasonable cause, failure to
file this annual statement will result in a penalty of
$10 for each consumer that should have been included
in the statement.
Critics of the Colorado approach argue that the law's
reporting regime is tantamount to requiring use tax
collection, because it includes features like audits and
penalties for failure to comply. In addition, critics
state, "Colorado's information reporting requirement is
excessive - and perhaps results in a reporting regime
that is ironically more burdensome than the tax
collection obligation struck down in Quill." (Kranz,
Smith, and Freeman, Colorado's End Run: Clever, Coercive,
and Unconstitutional, Tax Analysts, April 5, 2010.)
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Despite the fact that HB 1193 does not attribute nexus
based on the activity of in-state affiliates, Amazon.com
terminated its Colorado affiliates on March 8, 2010. It
is unclear whether this decision was motivated by a
desire to avoid tax collection or was simply intended as
a warning to other states considering similar
legislation.
HB 1193's constitutionality was recently called into
question by the U.S. District Court for the District of
Colorado. On January 26, 2011, Judge Robert E. Blackburn
issued a preliminary injunction barring Colorado's
enforcement of the law. Specifically, Judge Blackburn
found that the plaintiff had demonstrated a substantial
likelihood that HB 1193 violates the commerce clause by
imposing a burden on interstate commerce that is not
imposed on in-state commerce. Judge Blackburn also
concluded that the law likely violates the commerce
clause by imposing an undue burden on interstate
commerce.
d) What Would this Bill Do? : This bill would establish a
new and rather novel approach for reducing the use tax gap.
Specifically, it would impose a use tax collection
obligation on "out-of-state" retailers with in-state sister
companies that provide services connected to the retailer's
sales of TPP. Qualifying services would include the design
and development of TPP sold by the retailer, or the
solicitation of TPP sales on the retailer's behalf.
e) What Impact, If Any, Would this Bill Have on California
Affiliates? : Unlike the more traditional "Amazon" approach
noted above, this bill would not attribute nexus to remote
vendors based on the activity of in-state affiliates.
Indeed, this bill makes absolutely no reference to
affiliates and would instead attribute nexus based on the
activities of in-state sister companies. Nevertheless, in
a February 24, 2011 letter to BOE Member George Runner,
Amazon stated that it will terminate its relationships with
well over 10,000 affiliates if California adopts any of the
use tax collection proposals currently pending in the
Legislature, including AB 155.
f) The Legal Landscape : Some critics have suggested that
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the approach taken by AB 155 is prohibited by the Court of
Appeal's decision in Current, Inc. v. State Board of
Equalization (1994), 24 Cal.App.4th 382. As such, a more
detailed examination of this case is warranted.
Current, Inc. (Current) was an out-of-state mail order
company based in Colorado. In 1987, Current was acquired
by Deluxe Corporation (Deluxe), which had "considerable
commercial contacts within California." Id . at 385.
Thereafter, BOE asserted that Current had an obligation to
collect California's use tax under R&TC Section 6203(g).
Id . At the time, subdivision (g) imposed a collection duty
on "Ýa]ny retailer owned or controlled by the same
interests which Ýsic] own or control any retailer engaged
in business in the same or similar line of business in this
state." Id .
On review, the Court of Appeal held that Current's physical
nexus with the State of California was insufficient to
justify the imposition of a use tax collection duty. Id .
at 391. In reaching this conclusion, the Court noted that
neither Current nor Deluxe was the alter ego or agent of
the other for any purpose. Id . at 388. Neither solicited
orders for the products of the other. Id . Moreover, each
company had its own trade name, goodwill, marketing
practices and customer lists and each marketed its products
independently of the other. Id . Finally, the Court noted
that both companies were organized and operated as separate
and distinct corporate entities. Id.
Thus, the facts presented in Current are substantially
different from those contemplated by this bill. Current
stands for the proposition that common corporate ownership
is, by itself, an insufficient basis upon which to impose a
use tax collection duty. AB 155, however, does not
disregard the distinct legal status of affiliated
corporations. Instead, it asserts nexus in cases where an
affiliated corporation with California presence is
designing and developing TPP to be sold by the retailer, or
soliciting sales of TPP on the retailer's behalf. Such
affiliated companies would appear to be actively engaged in
both promoting and facilitating the remote vendor's sales
of TPP.
g) Recent Legislative Efforts Focused on Increasing Use Tax
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Collections : In recent years, California has taken other
steps to increase use tax compliance. Chief among these
efforts are the mandatory use tax registration program and
the permanent inclusion of a use tax line on the state's
income tax returns. Each is discussed briefly below:
i) Mandatory Use Tax Registration for Service
Enterprises : In 2009, California enacted R&TC Section
6225 seeking to increase use tax compliance among
California businesses that purchase TPP from
out-of-state. Specifically, Section 6225 requires
"qualified purchasers" to register with BOE for annual
use tax reporting. A qualified purchaser is defined as a
person that:
(1) Receives at least $100,000 in gross receipts
from business operations per calendar year;
(2) Is not required to hold a seller's permit or
certificate of registration for use tax;
(3) Does not hold a use tax direct payment permit;
and,
(4) Is not otherwise registered with BOE to report
use tax.
The BOE estimates that this mandatory registration
program will generate roughly $58.5 million in fiscal
year (FY) 2010-11 from a total of 556,012 registered
accounts.
ii) Permanent Inclusion of a Use Tax Line on Income Tax
Returns : In 2010, Governor Schwarzenegger signed SB 858
(Committee on Budget and Fiscal Review), Chapter 721,
into law as part of the FY 2010-11 Budget Agreement.
Among other things, SB 858 provided for the permanent
inclusion of a use tax line on the state's income tax
returns, thereby allowing income tax filers to fill-in
the amount of use tax due on their returns. BOE staff
estimated that this provision would increase General Fund
collections by roughly $9.2 million annually.
h) What is the Cost of Maintaining the Status Quo? : In
August 2010, Professor Richard A. Parker of San Diego State
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University issued a report reviewing the impact of
California's current use tax collection laws on economic
activity, commercial real estate values, jobs and payroll
in California. Among other things, Professor Parker noted
the following findings:
i) California-based retail businesses are losing $4.1
billion annually in sales to exclusively online
retailers. These losses are projected to grow to $7.7
billion in 2015 and $14.3 billion in 2020;
ii) Goldman Sachs estimates that online shopping will
increase from 4.4% of all retail sales to 17.1% of all
retail sales and that since 2000, internet sales have
more than tripled; and,
iii) 18,300 full-time equivalent jobs are currently lost
as a result of out-of-state online sales. This number is
projected to grow to 34,100 in 2015 and 63,400 in 2020.
i) Potential Amendments : This bill deletes the statutory
provisions that would, upon the enactment of authorizing
federal legislation, impose a use tax collection obligation
on any retailer soliciting orders for TPP by mail if the
solicitations are substantial and recurring and if other
specified conditions are met. Under current law, these
provisions only become operative if Congress affirmatively
acts to overturn or modify Quill . By deleting these
provisions, AB 155 would arguably remove California's
ability to impose nexus on remote mail-order vendors even
if authorized to do so by a change in federal law. Thus,
it is not clear what purpose is served by deleting these
provisions. The author may wish to consider amendments
retaining the provisions but modifying them to make
reference to remote Internet vendors as well as mail-order
companies, thereby bringing the provisions into the 21st
century.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
Angela's Glass Co.
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Barnes & Noble
Best Buy
California Business Properties Association
California Conference of Machinists
California Conference Board of the Amalgamated Transit Union
California Labor Federation
California Nurses Association
California Retailers Association
California State Association of Counties
California Tax Reform Association
California Teamsters Public Affairs Council
City of Berkeley
Echo Antique Gallery
Empire Vintage Clothing
Engineers and Scientists of California
Fontanetti's Batting Cages & More
Home Depot
International Longshore & Warehouse Union
"M" is for Mystery?and more
Ms. Fits Consignments
Northern California Independent Booksellers Association
Professional & Technical Engineers, Local 21
Repeat Performance
Rick's Furniture
Southern California Independent Booksellers Association
Sugar Hill
Sumner's Schwinn
TechAmerica
The Fresno Hock Shoppe
The Usuals
Tower Hydro
UNITE HERE!
United Food and Commercial Workers Union, Western States Council
Walmart
Webster's Sportscards
9 individuals
Opposition
California Taxpayers Association
Direct Marketing Association
Howard Jarvis Taxpayers Association
Internet Alliance
Performance Marketing Association
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Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098