News
 New
Internet Taxation Bills Threaten California
Technology Sector Jobs, Small
Businesses
By Kyla Christoffersen, policy staff, CalChamber
Two nearly identical California Chamber of
Commerce-opposed bills that will harm California
online marketplaces, Web-service providers, and
websites of small businesses and nonprofits have
been introduced in the Assembly.
The bills will change California’s sales tax law in
a way that will encourage out-of-state retailers to
instead use out-of state online marketplaces and
websites.
• AB 178 (Skinner; D-Berkeley), will be considered
by the Assembly Revenue and Taxation Committee on
April 27.
• ABX3 27 (C. Calderon; D-Montebello) may be acted
upon by the Assembly at any time while the third
extraordinary session remains open.
AB 178 and ABX3 27 would establish that California
nexus is created when any retailer enters into any
referral agreement with a California resident in
exchange for compensation or commission, such as by
a link, website, or otherwise that generates
referrals in excess of $10,000 in sales. “Nexus”
refers to the U.S. Constitution’s requirement that
an out-of-state retailer have a sufficient physical
connection with a state before the state can force
the retailer to collect the state’s sales or use
tax.
These bills would undermine the ability of
California companies to survive or do business in
the state. Although aimed at out-of-state companies,
AB 178 and ABX3 27 could inflict significant harm on
California companies. The language of AB 178 and
ABX3 27 is extremely vague and broad and could
impede numerous ways that California companies
currently survive or earn money, including: offering
online-marketplace services to customers that are
retailers around the globe; placing banners and
other advertisements on websites; and placing
“click-through” advertisement links on websites.
Competitive Disadvantage
AB 178 and ABX3 27 could place California companies
that offer online marketplace and other Web services
at a competitive disadvantage by creating a strong
disincentive for existing and potential out-of-state
customers/retailers to instead utilize service
providers in other states. By using out-of-state
competitor Web-service companies, out-of-state
retailers can lawfully avoid collecting California
sales or use tax, while still reaching California
consumers. There will be many other non-California
states from which to choose as only one other state,
New York, has adopted a similar nexus standard.
Moreover, a host of California companies and
nonprofits of all types and sizes that currently
depend on income from placing advertising and
“click-throughs” on their websites may lose these
advertising opportunities altogether. For example, a
major Internet retailer terminated all of its
“click-through” arrangements with New York-based
websites almost immediately after New York adopted
its new nexus law. Many California online companies
and nonprofit organizations offer information and
services on their websites that greatly benefit
consumers, free of cost. For website-owners, banner
advertisements and “click-throughs” are a major
source of income.
Reduces State Tax Revenue
AB 178 and ABX3 27 could result in behavioral
changes that ultimately may reduce state tax
revenue. The possibility of any new tax revenues
resulting from these bills may be more than offset
by the damage they could cause to California
web-service companies whose customer bases could
shrink or disappear, ultimately resulting in lost
jobs and fewer tax revenues stemming from lost
company revenue and lost jobs. Moreover, California
web-service and online companies are uniquely
positioned to move their operations to another state
due to their highly mobile nature.
Costly Litigation for the State
The bills could also result in costly litigation
against the state. A state’s enactment of a new
nexus standard does not mean that it is legal. The
form of nexus that AB 178 and ABX3 27 attempt to
establish has not been decided as constitutional by
the U.S. Supreme Court and thus could be subject to
immediate court challenge under the U.S. Commerce
Clause. For example, New York was sued immediately
after adoption of its nexus law last year and is
still in litigation with no end in sight. Such
costly court challenges against California could
last for years, making their way through the trial
and appellate courts at a time when California is
suffering from budgetary challenges and a severe
economic downturn,
Action Needed
AB 178 will be heard in the Assembly Revenue and
Taxation Committee on April 27.
The CalChamber urges members to ask the Assembly
Members who serve on the
Assembly Revenue & Taxation Committee to oppose
AB
178 and ABX3 27.
---Source:
CalChamber April 7, 2009 (www.calchamber.com). Kyla
Christoffersen is a policy advocate for legal,
taxation, intellectual property and corporate
governance issues. Reach her at kyla.christoffersen@calchamber.com
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