Sales Tax Amendment May Allow California To Tax Internet Sales

by Mike Godfrey, Tax-News.com, Washington

12 May 2003

An amendment to the state of California's tax code last week seeks to compel some firms based out of state to collect tax on internet purchases made by California residents.

The measure passed in California's Senate last Thursday by a 23-4 vote will affect firms that employ local companies to install or service products such as PC systems, like, for example, the Texas-based Dell Corp. Companies that are presently based in California, such as Hewlett Packard, already have to collect sales tax, and it is claimed this adds up to $100 to the price of a high end PC system.

The bill also seeks to tax internet sales made from out of state by firms which have 'bricks and mortar' retail subsidiaries in California. According to the new legislation, these are defined as companies with "a substantial ownership interest, directly or through a subsidiary, in a retailer maintaining sales locations in California."

Cross-border Internet sales have remained largely out of the clutches of the tax man in the United States, though the SSTP (Streamlined Sales Tax Project) campaign, which has an ever expanding list of states on its membership roster, is seeking a simplification of the sales tax code to enable cash-strapped states to start taking advantage of a potentially lucrative income stream. California, for example is facing a possible $35 billion deficit over the next 15 months.

In March of this year, the California board of equalisation voted 3-2 to increase the state's involvement with the project. State Comptroller, Steve Wesley, who voted for closer ties with the project, estimated at the time that the state forwent $1 billion in tax revenues from internet sales in 2001. However, similar estimates from various studies have produced some wildly differing results, and there appears no consensus as to what extent state coffers have been denied revenues from internet sales.

Only firms with a direct or indirect physical presence (nexus) within the state will be affected by the new change in Californian legislation, which now goes to the House of Assembly. Governor Davis vetoed similar legislation three years ago, but may not do so again.

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