As the state of California looks under the proverbial cushions for spare change to fund its ever expanding expenditures, out-of-state retailers have come under the ire of the taxman with the passage of Assembly Bill 155 (AB 155). As of Sept. 15, all out-of-state retailers, including Internet giants such as Amazon, must pay state sales taxes, even if they only possess a miniscule presence in the Golden State.
However, California’s use tax has been on the books since 1935, which required consumers to alert the state government to any out-of-state purchases on tax returns, but until recently the law was unenforceable and few Californians volunteered more of their dollars to Sacramento’s tax honor system. With the growth of Internet shopping, the California Legislature shifted the onus of documentation from the consumer to the retailer with imposition of the sales tax, with expectations of raising $317 million a year in revenue.
Unfortunately for California’s taxers and spenders, AB 155’s legality and logic are in dispute. In 1992 the Supreme Court case Quill Corp. v. North Dakota established that for a state to impose a sales tax on an out-of-state business, that business must have a “physical presence” within the state in question, otherwise the sales tax would overstep the federal government’s Commerce Clause prerogative, and in effect become a domestic duty.
To try to outmaneuver this Supreme Court ruling, AB 155 codified two methods in which to establish a “physical presence”; if retailers have a related company residing within the state, or if retailers pay commissions to those whom refer consumers onto their websites. It remains to be seen if the California Legislature has finally outwitted the Supreme Court, or if this is just another doomed attempt to subvert the 1992 ruling.
Either way, stand by for years of costly litigation.
California’s tax collection agency, the ominously-named Board of Equalization, gave the new law a ringing endorsement, with Chairman Jerome E. Horton gushing, “the law will help level the playing field for all who [sic] do business here. California and its businesses will not be held hostage to unfair business practices.”
Ironically, if Mr. Horton truly frets about unfair business practices, perhaps he should peruse Chief Executive magazine’s May article, which ranks California as dead last of the fifty states in business climate due to regulatory and tax excesses for the second year in a row.
Perhaps if he and others of the political class worry about leveling the playing field, they should ponder taming the ever-growing Sacramento budget beast in order that they can lower the sales tax rate for all Californians, which is currently the nation’s highest at 7.25 percent.
Instead of leveling the playing field by penalizing online distributors, a prudent government would reduce the sales tax burden so brick-and-mortar retailers can stay competitive.
Unfortunately, with Proposition 30 coming up for vote this year, which would raise our state’s already highest-in-the-nation sales tax to 7.5 percent, the political winds are blowing in the opposite direction. Further taxes will not save this state from the fiscal insolvency.
As Nobel laureate Milton Friedman once quipped, “Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.”
Gov. Jerry Brown and his legislative allies constitute living proof to this adage, and until the people grow fatigued of this governmental mismanagement, they will continue to get away with fleecing the Golden State.