Calif rejects Internet tax effort (and for good reason)

I have been predicting this for many years. In my opinion, California (or any of the largest states) would never join the group trying to standardize sales taxes and, thusly, begin to tax Internet sales. Looks like, for once, I was right.

On the face if it, it sounds stupid for CA to not want a piece of the huge untaxed Internet sales. What people do not understand is that there is already state laws for a “Use” tax which taxes out-of-state purchases based on the “use” of the item in the state. There is even a space for it on your personal California tax return, which no one fills out.

California already goes after businesses that purchase out-of-state goods and makes them pay this use tax. If they were to adopt this uniform multi-state standardization they would likely lose tax revenue. Think about it: California has an economy larger than most countries. CA is not about to give up the right to collect use tax on that huge amount of consumption which it would under any type of multi-state standardization.  

Don’t expect the feds to step in either. This is a state matter. 

State walks away from Internet tax effort

Silicon Valley / San Jose Business Journal – February 9, 2007

At a time when California is trying to find money to balance the
budget, fund a statewide health-care plan and build roads and schools,
lawmakers have backed away from one potential source of money: the

Eliminating that possibility was, in the words of Board of
Equalization member Bill Leonard, “a non-decision” that occurred last
year when the Legislature declined to fund California’s involvement
with other states in an effort to synchronize state sales taxes.
Simplifying the taxes charged by the nation’s 7,500 tax jurisdictions
is the first step before asking Congress for the right to require
sellers on the Internet to collect sales tax for local jurisdictions.

Organizers of the tax effort say California’s absence doesn’t doom
the effort, but without the nation’s most populous state as well as the
absence of New York, Texas and Florida, it appears unlikely that the 15
smaller states can prevail with the idea, although they plan to lobby
Congress this year for the taxing legislation.

According to the Board of Equalization, California forfeits about $2
billion a year in taxes by not collecting on out-of-state sales made
over the Internet.

The state does require Internet retailers who have physical stores
in California to collect sales tax on sales made to Californians. The
state also requires its residents to report purchases made over the
Internet and pay taxes on them. Apparently few people do. (There’s a
line on the income tax form, in case you’ve missed it.)

In 1992, near the dawn of e-commerce, the U.S. Supreme Court ruled
in a North Dakota case that states cannot impose their taxes on other
states. It would take Congress to overcome that barrier. Fifteen states
have joined a compact in which they agree to regularize their sales

The number of states involved has varied over the six years that
they have been working on the issue. California got involved in 2003 at
the urging of then-state senator Debra Bowen, who is now Secretary of

The number has dwindled, however, as the larger states began to
realize the changes they would have to make to conform to the wishes of
the smaller states. Each state has just one vote on the governing board
of the Streamlined Sales Tax Initiative.

At the moment, the largest states involved are New Jersey, Michigan, Indiana and Ohio.

Meanwhile, California, Texas, New York and Florida are on the outside, although Florida and New York are still looking in.

Washington, Wisconsin, Massachusetts and Hawaii are considering
changes in their tax codes, says Harley Duncan, executive director of
the Federation of Tax Administrators, an organization of all the tax
agencies of all 50 states.

“It would be good to have all the states involved,” he says.

Some states may be reluctant to make a move until Congress has
actually authorized the states to require the sales tax collection,
Duncan says.

“Until we can mount a credible effort on the hill, it’s kind of easy for states to say, what’s in it for me?” he says.

Two bills were floated last year, but they differed in how they
defined the term “small business.” That was important because in both
bills small businesses were exempt from collecting the sales tax.
Congress wanted the states to decide the issue before taking up the
legislation, says Scott Peterson, executive director of the Streamlined
Sales Tax Governing Board.

This year, the states will need to agree on the small business
definition and make another push on Capitol Hill. So far, however, the
Senate Finance Committee, which has jurisdiction over the matter, has
no hearing scheduled on the issue, and it has not caught the attention
of the House of Representatives either.

U.S. Rep. Zoe Lofgren, D-San Jose, who serves on the House Judiciary
Committee — which would consider the matter if it comes to Congress —
says the issue has many complications. For one, some taxing districts
could lose revenue, she says.

In a separate issue, Congress will consider renewing a moratorium on taxing Internet connections that expires in November.

“We need to enhance and accelerate the use of the Internet and broadband,” Lofgren says, “not tax it.”

California, which would have had only one vote among the smaller
states, would have had to give up power over much of its taxing
authority, and BOE members began to doubt the advisability of the move
when they began to realize just how out-of-sync the compact members
were with California.

The three big problems cited by Leonard were:

  • District taxes, like the one for BART to San Jose and Santa Clara, would have to be eliminated or made statewide.
  • Sales taxes would have to be uniform throughout the state.
  • The state would lose much of its authority to choose what is taxable
    and what is not. Under the compact among the 15 states, for instance,
    juice, water and soda would have to be considered as one. California
    doesn’t tax water and juice, but it does tax soda. That difference
    would not be permissible under the joint state agreement.

“I don’t like giving up my sovereignty to some interstate commission to decide if we tax soda or not,” Leonard says.



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