Tax Sales Fairly, On or Off the Net

There’s a lot of misunderstanding about sales taxes on Internet purchases; it’s a complicated matter. California’s sales tax applies to Internet purchases in the state from retailers that have stores within the state. But there’s a loophole in the law that allows some businesses to evade the tax. Now, in a move to close that exception, the Legislature has passed AB 2412, by Assemblywoman Carole Migden (D-San Francisco). Although Gov. Gray Davis has announced his opposition to “taxing the Internet,” Migden’s bill would provide fairness for California businesses. Davis should reconsider his veto threat and sign AB 2412 into law.

Present law, supported by a 1992 U.S. Supreme Court ruling, requires businesses to collect the tax on mail order, telephone or other forms of catalog sales if they operate stores in California or have some other physical presence in the state. For instance, Macy’s and outdoor outfitter REI, which have many stores across the state, charge sales tax on both mail orders and Internet orders from California. Retailers like Land’s End and Amazon.com don’t, since they have no brick-and-mortar outlets in the state.

Here’s the loophole: Some firms such as Borders Books and Barnes & Noble, both of which have California stores, are avoiding the tax by creating subsidiary companies that do nothing but handle their Internet orders. These subsidiaries, having no physical presence in the state, do not collect California sales tax.

The Migden bill would declare that who processes orders has no bearing on a retailer’s responsibility to collect the sales tax--that an e-commerce subsidiary is considered to have a presence in California if it uses some form of the parent company’s name, markets similar products or utilizes joint facilities to advertise or market its goods.

Amazon.com and other out-of-state vendors still would not have to charge sales taxes on their California sales.

We share Davis’ concern about taxing the Internet in a way that might discriminate against some firms or deflate the state’s vigorous electronics and technology industries. But this is not a new tax on Internet sales or a tax increase. Fairness should be restored for California businesses that are playing by the rules.

The bill does not favor or discriminate against any particular technology or means of communication. The measure merely declares that orders over the Internet should be treated the same as orders by mail, fax, telephone or any other medium. All such sales are essentially the same, and they should be taxed the same.