State Senate Says Yes to Internet tax bill [9th May 2003]

Thanks to a Senate vote on Thursday, May 8, 2003 online retailers, such as barnesandnoble.com and Dell, must now charge sales tax to their California customers.

The legislation, sponsored by Sen. Dede Alpert, D-San Diego, is somewhat broader than a similar bill Gov. Gray Davis vetoed three years ago but said he would reconsider as the Internet matured.

Alpert's bill would apply not only to online sellers such as barnesandnoble.com that are affiliated with companies that have retail outlets in California, but also to out-of-state computer makers such as Dell that offer local repair services to their California customers. Her bill is expected to raise at least $20 million.

Some retailers, including Gap, already collect the tax from their online customers, and Alpert insisted the tax was due under current law.

``This is not a new tax,'' she said. ``It is a better collection of an existing tax.''

But opponents say she is going beyond the existing law, which applies to companies with a ``physical presence,'' such as a retail outlet, in the state. Including out-of-state Internet retailers that provide local repair services, they say, not only goes beyond the law but would be hard to regulate.

``If I tell you you can go to Joe's Computer Repair Shop on the corner, then I have to collect and remit California sales tax,'' said Roxanne Gould, a lobbyist with AeA, formerly known as the American Electronics Association. Rather than a statewide solution, she said her group would prefer a uniform national tax.

`Too complicated'

``The system is too complicated today for this to be a realistic proposal. The Internet doesn't stop at the California border.''

Gould said 55 percent of computers sold in California are sold by companies that have headquarters out of state.

Cathie Hargett, a spokeswoman for Round Rock, Texas-based Dell, said the company was still studying the legislation and could not say whether the company would be affected.

Alpert, though, assured that it would.

Hargett said Dell is ``collecting sales tax on the vast majority of our business in California and 85 percent of our business is with business and government institutions.''

She said Dell doesn't collect sales tax related to consumer sales through the telephone or Internet but alerts California customers of their obligation to pay appropriate taxes. She also said the company does not have a physical presence in California.

Republican opponents in the Senate said Alpert's bill would put California Internet businesses at a competitive disadvantage.

``It pushes more and more commerce, as easily as a mouse click, out of California,'' said Sen. Tom McClintock, R-Thousand Oaks.

But supporters said companies like Barnes & Noble are flouting the law by creating separate online entities based out of state that are legally separate but, in practice, operate in tandem with local retail outlets.

``You can order a book from the online affiliate and return it to a bricks-and-mortar store,'' said state Sen. Debra Bowen, D-Redondo Beach.

``The legal separation is a fiction and we ought not in this state allow the kind of corporate structure that encourages people to set up a fictional entity that is legally separate solely for the purpose of avoiding the responsibility to collect taxes.''

Representatives for Barnes & Noble could not be reached for comment.

Tax revenue unclear

It's unclear how much money a more aggressive collection of the tax could generate. A preliminary analysis by the state Board of Equalization estimated it would bring in a scant $14 million to the state next year and an added $6 million for local government. But Alpert said officials did not know how widespread the practice of avoiding the tax had become and the amount could be much higher.

Earlier this year, Davis said he would consider an Internet sales tax as a means of filling the state's budget gap, which he has estimated at $34.6 billion through June 2004. But a spokesman said Davis had no comment on Alpert's bill, which now heads to the Assembly.

Under an agreement with nearly 40 states and the District of Columbia, retailers, such as Wal-Mart Stores, Toys R Us and Target, already collect sales tax from their online customers.