California introduces “affiliate nexus” and Colorado-style reporting legislation

Yesterday (January 18) two assembly bills were introduced in California that should catch the attention of every retailer on the internet. (Update 1/20/2011 @ 5:16 AM – AB 153 and 155 “may be heard in committee 2/18/2011″)

Assembly Bill 153, introduced by Assembly Member Nancy Skinner, is a form of legislation frequently referred to as an “Amazon tax”—we tend to refer to it as “complex nexus” legislation because, well, it is complex! It involves unilateral state-by-state legislation designed to redefine the concept of substantial nexus (i.e., “place of business”) to single out internet-based affiliate network businesses. Specifically, AB 153 suggests expanding the definition of a  “retailer engaged in business in this state” to include:

Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential
purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise, provided that the total cumulative sales price from all of the retailer’s sales, within the preceding 12 months, of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, is in excess of ten thousand dollars ($10,000).

In addition to AB 153, Assembly Bill 155 was introduced the same day by Assembly Member Charles Calderon. AB 155 proposes the adoption of burdensome new notice and reporting requirements, similar to those adopted last year by the state of Colorado. The important changes include:

     

  1. In administration of the use tax, the board may require the filing of reports by any person or class of persons  having  in  his or their possession or custody  of  information relating to sales of tangible personal property,  the storage, use, or other consumption of which is subject to the tax. The reports shall be filed when the board requires and shall set forth the names and addresses of purchasers of the tangible personal property, the sales price of the property, the date of sale, and such other information as the board may require.
    1. Every person that sells tangible personal property, the storage, use, or other consumption of which is subject to use tax, that is not registered with the board, shall annually file with the board a report that sets forth the names and addresses of purchasers of the tangible personal property, the sales price of the property, the date of sale, and other relevant information as may be required by the board.
    2. Paragraph (1) shall not apply to a person whose receipts from sales described in paragraph (1) are less than five hundred thousand dollars ($500,000) in the prior calendar year, and are reasonably expected to be less than five hundred thousand dollars ($500,000) in the current calendar year.
    3. Each person required to comply with paragraph (1) shall be subject to a penalty of ten dollars ($10) per violation for each name of a purchaser that was not included in the report for each annual period. If the board finds that a person’s failure to comply with paragraph (1) is due to reasonable cause and circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of the penalties provided in this paragraph.
    1. Each person required to comply with paragraph (1) of subdivision (b) shall annually send a notice to each purchaser showing the total amount of purchases made by that purchaser in the prior calendar year. The notice shall inform the purchaser of the obligation to file the appropriate sales and use tax returns. The notice shall be sent separately to each purchaser, by first-class mail, with the following notice contained on the exterior of the envelope: “Important Tax Document Enclosed.”
    2. Each person required to comply with paragraph (1) shall be subject to a penalty of ten dollars ($10) per violation for each purchaser to whom notice is not sent. If the board finds that a person’s failure to comply with paragraph (1) of this subdivision is due to reasonable cause and circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of the penalties provided in this paragraph.

We sincerely hope California legislators will reconsider these steps.

Regarding HB 153, we feel it is simply unwise to attempt to build a system of taxation based purely on a retailers’ chosen marketing practices—because they will simply discontinue those practices.

Regarding HB 155, we believe it will be challenging to enforce such excessively burdensome reporting requirements on retailers, particularly because they may violate consumer privacy protections in the state of California.

We recommend that California seriously consider enacting sales tax legislation to bring California into compliance with the Streamlined Sales and Use Tax Agreement (SSUTA).

The SSUTA initiative—which involves a multilateral, forty-four state coalition (including California) that has been working for over ten years to modernize and simplify sales tax codes—creates a single, workable approach for all merchants to collect sales tax for all states. SSUTA is designed to simplify and standardize sales and use tax laws (including standard definitions for taxable goods, tax holidays, and rate change notices), with the goal of enabling any out-of-state sellersto easily comply with local sales tax initiatives. Moreover, unlike the concept of complex nexus, SSUTA is also based upon and supported by an extensive body of regulation and case law surrounding sales and use tax jurisdiction and liability. As we have pointed out, California has been a contributor to the SSUTA effort since its earliest days; they just haven’t taken the next step of updating their state sales tax codes to conform to the Agreement. (Twenty-four states have already updated their sales tax codes, and Missouri recently introduced legislation to join the SSUTA as well.)

As regular readers of this blog know, FedTax.net is a Certified Service Provider under the SSUTA and is optimized for the needs of small merchants. Our TaxCloud service is provided at no cost to merchants, and only minimal integration is required. While our system enables accurate determination of local sales tax under any approach, we believe the SSUTA model is best for taxpayers, businesses, and states.

We sincerely hope that legislators in California will recognize that HB 153 and 155 are interim measures that will not solve this problem in a meaningful way over the long term. We urge California to instead move toward becoming a full SSUTA member state and supporting federal legislation (the Main Street Fairness Act), which we expect will be reintroduced in Congress shortly.

One Response to California introduces “affiliate nexus” and Colorado-style reporting legislation

  1. […] to be required to collect California sales tax. Our regular readers may recall that AB 155 was initially introduced as reporting requirement bill, very similar to Colorado’s legally embroiled reporting requirement law, HB 1193. […]

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