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California's Internet Tax Bill Moves Forward

State would join with 36 other states in supporting the Streamlined Sales Tax Project

SACRAMENTO, Calif. -- Eliminating the nearly dime-a-dollar price advantage that out-of-state online, catalog, and mail order businesses have over every California "brick-and-mortar" retailer is the long-term goal of SB 157 by Sen. Debra Bowen, which was approved by the full Senate this week on a bipartisan 25-13 vote.

"This isn't about 'taxing the Internet,' it's about tax fairness, because people should be taxed on what they buy, not on how they buy it," said Bowen. "The current system gives thousands of out-of-state businesses an instant 7.25-8.5% price advantage over every California retailer. While California's 68-year-old use tax law requires people who don't pay sales taxes on an item to pay an identical amount in 'use taxes' to the state, very few people know about that obligation. As a result, California misses out on billions of dollars in uncollected sales tax dollars."

The passage of SB 157 follows the May 15 release of a report by Shop.org, a division of the National Retailing Federation, that says online sales will reach $96 billion this year, a 26% increase over last year, and will account for 4.5% of the overall retail sales market. According to a recent study, California lost $1.75 billion in sales taxes due to purchases made over the Internet in 2001. Nationwide, state and local governments lost $13.3 billion in sales taxes due to Internet purchases - a loss that's expected to grow to $45 billion by 2006.

U.S. Supreme Court decisions prevent states from requiring out-of-state businesses to collect sales taxes on Internet, catalog, mail, or phone orders unless the business has a physical presence (such as a store, warehouse, or corporate office) in the state.

"Why should you pay sales taxes when you buy something from the mall while your neighbor, who shops from a catalog or over the Internet from the comfort of her living room, can avoid paying those same taxes?," continued Bowen. "The need to pay for police services, fire services, road construction, park maintenance, and much more doesn't disappear just because someone chooses to shop at a 'virtual' mall. If your neighbor's house catches on fire, she's going to want a real fire truck with real firefighters on it to show up - she's not going to want to rely on a 'virtual' fire truck with virtual hoses and ladders to save her."

SB 157 requires California to join the "Streamlined Sales Tax Project," a group of 36 states and the District of Columbia that crafted the Streamlined Sales & Use Tax Agreement (SSUTA). That agreement has already been adopted by thirteen states - Arkansas, Indiana, Kansas, Kentucky, Minnesota, Nebraska, North Carolina, North Dakota, South Dakota, Utah, Washington, West Virginia, and Wyoming - and 15 others are considering complying with the agreement this year.

SB 157 doesn't require California to adopt the agreement or change its tax structure. It simply requires the state to join the group of 36 states and the District of Columbia for further discussions with an eye toward adopting the agreement. Should California later endorse the SSUTA, it will have to alter its tax laws if it wants to require out-of-state retailers to begin collecting California sales taxes.

"Continuing to sit on the sidelines as California has done for three years while that discussion takes place shortchanges local police, fire, park, library, and transportation services," concluded Bowen. "It doesn't just penalize the California businesses that have to collect California sales taxes. It also hurts the people who shop locally and are forced to pick up a larger share of the tab for those critical services that everyone in California relies on to be there when they need them. Nobody enjoys paying taxes, but they certainly expect them to be fair. The current system that taxes people not just on what they buy but on how they buy it doesn't meet anyone's definition of 'tax fairness.'"

California's basic sales tax rate is 7.25% (5% goes to the state, 2.25% goes to local governments), and local governments are permitted to add additional sales taxes ranging from 0.125% to 2.0%.

SB 157 will be assigned to an Assembly policy committee later this month.