California Governor Vetoes Net Tax Bill

A proposed law that would have forced businesses operating in California to charge sales tax for online transactions within the state was vetoed Monday by Governor Gray Davis.

Concurrently, Davis signed a bill extending California’s moratorium on Internet access taxes for three years, although the latter bill would have become law only if the Internet sales tax bill, AB 2412, had passed.

California state assemblywoman Carole Migden (D-San Francisco) told the E-Commerce Times that AB 2412 will be re-introduced in the California State Assembly. The proposed law would have required businesses with both a physical and online presence to levy the same taxes on all of their sales.

“The veto message is inaccurate,” Migden said. “The bill doesn’t expand taxation for electronic sales, it just reaffirms existing law today. I believe big business and small business should abide by the same laws.”

Whom to Protect

The veto crystalized the debate on online taxation. One side stresses the need for e-commerce needs to be nurtured; the other side fears such nurturing will come at the expense of small brick-and-mortar businesses.

In vetoing the bill, Davis sided with the online retailers, at the expense of a projected windfall of tens of millions of dollars (US$) in tax revenue had the bill become law.

“In order for the Internet to reach its full potential as a marketing medium and job creator it must be given time to mature,” Davis said in his statement to the Assembly. “At present, it is less than 10 years old. Imposing sales taxes on Internet transactions at this point in its young life would send the wrong signal about California’s international role as the incubator of the dot-com community.”

Davis added that AB 2412 “singles out companies that are conducting transactions electronically and attempts to impose tax collection obligations on them to which, according to California courts, they are not subject.”

Same Bill, Different Interpretations

According to Migden, to say that the bill would have expanded taxation is wrong. “[The bill] just says Barnes and Noble should have to do the same as your local bookstore,” Migden said.

Reportedly, most online companies that have a retail presence in California do apply sales tax to their Internet sales, but others, including Barnesandnoble.com and Borders.com, do not.

“That’s driving your little baby business out of business,” Migden said. “All we’re saying is, let’s abide by the same laws.”

Migden added that it is too soon to say if any changes would be made when the bill is re-introduced.

Commission Created To Study Issue

In addition to vetoing the Internet sales tax bill, Davis performed the largely symbolic act of signing AB 1784, a three-year extension of California’s Internet Tax Freedom Act that became moot with the Internet sales tax veto.

AB 1784 was devised to “prevent a patchwork of local Internet access taxes in this state and send an important signal to the federal government as it negotiates legislation to extend the Federal Internet Tax Freedom Act,” according to Davis.

Davis also signed an additional bill creating the California Commission on Tax Policy in the New Economy, which will examine sales tax issues and develop a long-term strategy in relation to technology and local tax structure in California.