California Lawmakers Pushing Trio of Dubious Internet Tax Bills

Published June 18, 2011

This marks the third year in a row Sacramento’s legislative elite have pushed a tax on Internet sales. And the three bills contending for leader of the pack this year are far more overreaching than ever before, greatly expanding the state’s power to reach across borders for more revenue.

It’s no surprise that politicians, Board of Equalization (BOE) members, and Sacramento’s spending interests are salivating over the opportunity to find new tax revenue by targeting people outside of California. A recent public records request from Americans for Tax Reform uncovered email on the subject between current BOE Chairman Jerome Horton’s office and SEIU Local 1000, the state’s largest public employees union. And BOE Board Member Betty Yee is not just an official sponsor but a vocal proponent of the vaguest bill that would give her even more taxing power.

At issue is the U.S. Supreme Court decision Quill v. North Dakota, which ruled attempts to force out-of-state companies to collect taxes is a violation of the Commerce Clause of the US Constitution. But that court ruling hasn’t stopped California.

Vague Powers to Board
In May, the California Senate passed legislation that ducks the question on exactly how to tax Internet sales, instead handing enormously vague power to the Board of Equalization. The bill, from Sen. Loni Hancock (D-Oakland), would allow the long arm of the tax collector to reach across the state border and force anyone it feels has “substantial nexus” in California to collect sales tax on residents, regardless of whether the business has ever set foot in the Golden State.

Then in June, the Assembly approved two more Internet tax measures. These include a perennially introduced bill by Assembly Member Nancy Skinner (D-Berkeley) whereby an out-of-state retailer must collect taxes simply for contracting with a California-based Internet advertiser. In every state where this has been tried, retailers have severed their ties with advertisers to avoid the tax, and lawmakers have ended up putting their own constituents out of business.

Mere Investment Enough
Another bill, from Assembly Member Charles Calderon (D-Whittier) would force out-of-state retailers to collect taxes if they merely own or invest in a separate subsidiary company in the state. Good luck asking out-of-state companies to invest in California if this passes.

Of these unconstitutional money grabs, Hancock’s bill appears worst by far, effectively saying that whatever the BOE decides is what constitutes a “physical presence.” Should it pass, the most likely outcome is a series of costly lawsuits funded by California taxpayers. Watch for the BOE and out-of-state retailers to spend years going back and forth between regulatory actions and subsequent court challenges. Nevertheless, each of the bills would harm in-state businesses, drive them out of the state, or discourage outside companies from investing or moving in.

Perhaps most disturbing are the measures’ prospects for passage. Bills that explicitly raise revenue are supposed to be subject to the state’s two-thirds supermajority vote to raise taxes, but have fun telling that to the California legislature. Each of the bills has passed either the Senate or Assembly already, despite raising revenue. Hancock’s bill claims the revenue estimate is “unknown.” Never mind that the BOE’s analysis says the bill would raise taxes by $374 million a year.

Worst of the Bunch
To be sure, California is not alone in this effort.  Well over a dozen states – at the behest of big-box retailers – are pushing measures to circumvent Supreme Court jurisprudence and enact loose interpretations of what it means to have a footprint in the state. Most have failed. Yet none give as much vague authority to the state taxing agency – or are as ripe for abuse – as the California trio.

Legislation raising taxes and handing state agencies nebulous authority is bad enough. But forcing non-residents – who can’t vote these politicians out of office – to comply with California tax laws is an affront to both the democratic process and the Constitution.

Kelly William Cobb ([email protected]) is government affairs manager of Americans for Tax Reform. Used with permission from California’s