AB 153 would require any out-of-state retailer to collect California sales tax if that retailer pays click-through commissions to any California business in excess of
$10,000 $500,000 annually (note: revised upward 3 days ago). AB 153, if approved by the State Senate and signed by Governor Brown, will mandate that any website link advertisement (where compensation is paid if a sale is completed) is the legal equivalent to a door-to-door salesperson—invoking the sales tax collection obligation provisions of the Supreme Court’s 1992 Quill decision.
As many of our regular readers know, many web-based businesses regularly display commission-bearing advertisements on their websites. Perhaps more troubling than the typical “Amazon.com” affiliate relationships that have been in the news so much lately, consider the possible impact of this legislation on California companies, such as eBay. EBay’s entire business is based upon receiving a commission upon completed sales. If AB 153 becomes law, potentially every eBay seller could be required to collect California sales tax if they sell (or even market) any products to just one California resident. We expect this may explain the sudden huge jump in the “occasional sales” exception threshold.
Seriously though?! Is $500,000 annually really an “occasional seller“? That must be one heck of a garage sale!
Meanwhile, AB 155 is now focused entirely on mandating that so-called “sister companies” based in California establish sufficient nexus for out-of-state “parent” or “sibling” companies 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. Fortunately AB 155 has been amended several times since then to eliminate the more troublesome reporting obligations and achieve its new form. Although, as it is worded now, it would seem quite likely to cause affected out-of-state retailers with investments in California businesses to simply withdraw those related entities from the state entirely. While we are sure there are numerous examples of such entities, Lab126 (the developer of the Kindle for Amazon) comes immediately to mind.
While we appreciate and respect California’s need to fix the current imbalance related to sales tax collection obligations, which costs the state over $1.1 billion annually, we sincerely hope those entrusted to do the people’s work in Sacramento recognize that this matter must ultimately be resolved in Washington DC.
Under the Supreme Court’s 1967 National Bellas Hess vs. Illinois Department of Revenue ruling, the ability of states to compel remote or out-of-state businesses to collect local sales tax hinges on minimizing (or eliminating) burdens implied by such an obligation. In its majority opinion (now forty-four years ago), the Court ruled that
the many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s interstate business in a virtual welter of complicated obligations to local jurisdictions.
So, unless and until California directly addresses these three points of undue burden, attempts to compel remote retailers to collect will not likely survive litigation and judicial review.
Fortunately, California has been working with 43 other states on the Streamlined Sales and Use Tax Agreement since 2000 —a system that alleviates all of these burdens (and is FREE for retailers to implement). Governor Brown and the California legislature should urge California’s delegation in Congress to sponsor and work to pass the federal Main Street Fairness Act, which would eliminate the need for California to venture into such controversial interpretations and extensions of the concepts of nexus and would finally enable California to require out-of-state retailers to collect sales tax, just as any local retailer is required to do.