A Taxing Decision on Internet Bill for Gov. Davis

One of the most intriguing bills passed by the Legislature just before it adjourned was a “bricks-and-clicks” sales tax measure. Its purpose is to close a tax loophole benefiting some Internet retailers. Democrats voted for it overwhelmingly. Practically every Republican was opposed.

The Democratic governor is siding with--the Republicans. That’s right! He’s expected to line up against his own party and veto the legislation.

It wouldn’t be the first time this cautious centrist has rejected a Democratic bill and it won’t be the last. Usually, however, he leans on Assembly allies to kill an annoying measure before it ever reaches him.

It’s more difficult, however, to intimidate the author of this bill, feisty Assemblywoman Carole Migden (D-San Francisco), who chairs the powerful Appropriations Committee. She says the governor didn’t try, although “he let me know through his staff and friends that he does not favor the bill. . . .

“It’s a greatly feared bill that people were hellbent on stopping. Every committee hearing was a pitched battle.”

Perhaps this is a bill Davis relishes vetoing, thinking it will send a signal that he’s a futuristic, New Age pol--and worthy of campaign donations from the super-rich dot-com technies of Silicon Valley.

Cyberspace sales taxes is a complex issue that gets reduced in government capitals to sound bite politics: “Taxing the Internet” vs. “leveling the playing field.”

“The Internet and technological improvements have been the driving force in keeping America productive, creating new wealth and new jobs,” Davis told reporters Friday. “I do believe in a general way that we should keep the Internet free of additional taxation for awhile.”

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Additional taxation is not really what this bill is about, its backers argue. It’s about fairly enforcing the existing tax law.

Present law requires Internet e-tailers--and catalog companies--to collect the sales tax if they have a physical presence in California, such as a traditional brick-and-mortar store. But some big outfits--notably booksellers Barnes & Noble and Borders--have created ostensibly separate out-of-state subsidiaries to handle their Internet orders. Same goods, same ads, virtually the same names--with a huge tax loophole because the subsidiary supposedly does not have a physical presence in California.

Never mind that after clicking onto the Internet and buying an item, an unsatisfied customer often can return it to the local store.

Migden’s bill would close that loophole. It was promoted by roughly 300 independent booksellers in Northern California.

The loophole is unfair, not only to small stores, but to large firms--like Macy’s--that also sell online and do collect the sales tax, protests Andy Ross, owner of Cody’s Books near UC Berkeley.

“The Internet is part of the human community,” Ross says, “and should be doing its part to collect the taxes that provide the services that allow it to prosper--like schools and police.”

Republicans claim that Migden’s bill does too impose additional taxation. What else do you call bringing in new tax revenue, they ask. The state Board of Equalization, which administers the sales tax, estimates that the measure would pick up $14.4 million the first year. That’s a piddling amount by California standards, but opponents claim it’s a dangerous precedent for future Internet taxation.

“It’s the tip of the iceberg,” says Dean Andal, a Republican who chairs the Board of Equalization. “California is winning the Internet competition, and one of the reasons is we really do have attractive laws on our books for high-tech.

“Why mess around with a rinky-dink little bill that may benefit a few booksellers?”

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This has nothing to do with the federal and state moratoriums on Internet access taxes, a different issue.

But part of the intrigue around Migden’s bill is that Senate Democrats “joined” it to a measure by Silicon Valley Assemblyman Ted Lempert (D-San Carlos), which would extend the state moratorium on access taxes beyond 2001. Lempert’s bill can’t take affect unless Migden’s does. But nobody’s advocating an access tax anyway.

Davis also has on his desk a bill by Sen. John Vasconcellos (D-Santa Clara) to create a study commission on “tax policy in the new economy.”

A couple of things already seem clear:

Dot-com tax breaks discriminate against the poor who cannot afford Internet access, let alone a home computer.

Since cyberspace is fueling all this fabulous new wealth, as Davis notes, perhaps it no longer needs to be coddled by politicians. Big e-tailers really don’t need a tax break at the expense of the little corner bookstore.