California's Internet Tax Trio


Posted by Kelly William Cobb on Friday, June 10th, 2011, 11:19 AM PERMALINK

The following op-ed was originally posted in California's FlashReport.

This marks the third year in a row Sacramento’s elite have pushed a tax on Internet sales. Yet, 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 those outside of California. A recent Public Records Request from Americans for Tax Reform uncovered email on the subject between now 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 that attempts to force out-of-state companies to collect taxes is a violation of the Commerce Clause. But that court ruling hasn’t stopped California.

Earlier last month, 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 (BOE). The bill, from Senator 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 last week, the Assembly approved two more Internet tax measures. This includes 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 was tried, retailers severed their ties with advertisers to avoid the tax and lawmakers ended up putting their own constituents out of business.

Another, from Assembly Member Charles Calderon (D-Whittier) would force out-of-state retailers to collect tax 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 worse 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 will harm in-state businesses, drive them out of the state, or discourage outside companies from investing or moving in.

Perhaps most disconcerting 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.

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. Thankfully for taxpayers 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 is government affairs manager of Americans for Tax Reform and executive director of StopETaxes.com and DigitalLiberty.Net.

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