TAXING THE INTERNET

By Bill Leonard

That new economy is giving rise to new businesses that can be run from anywhere in the world and serve anyone in the world. That is resulting in tremendous changes to the way business is done. However, government has a hard time reacting to innovation and the liberals who run the state Legislature have proved once again that their true allegiance is to government power, not to empowering individuals.

On May 31st, the State Assembly approved AB2142 by Carole Migden, a Democrat from San Francisco, to extend that state sales tax to Internet sales by companies that have a "brick-and-mortar" presence in California. The proponents of the bill argued that it is not fair for retail stores in the state to have to collect sales tax when Internet sites with warehouses or distribution centers in the state do not have to collect the tax. In that sense, the proponents were right. It is not fair.

But their solution is not fair to Californians. It is not fair first because now many Internet purchases will cost more. It is not fair, too--and more so--because those businesses that will now be subject to an additional tax for being in California will make the smart business decision to leave California, and they will take their jobs with them. It is also not fair because it postpones our responsibility for dealing with what will be a serious fiscal issue in our future. The sales tax is dying as a source of state revenue. The sooner we address that and determine how we restructure state finances and services to deal with that reality, the better for the people and taxpayers of California.

What would a solution to address these issues be? I proposed the solution in AB2367. This bill was titled the Internet Fairness Act and suggested that rather than leveling the playing field by taxing e-tailers, we should stop taxing traditional retail sales in the state. The bill would phase out the state portion of the sales tax over the next 20 years, leaving the local portion of the tax in place. That local portion would be about equal to what Internet sites charge for shipping and handling. You, the consumer, would be able to get the best deal on a product, whether you buy it at the corner store, over the phone, or via a website.

Thus, my bill helped consumers, provided incentives for both traditional stores and Internet sources to locate and create jobs in California, and asked the Legislature to begin to deal now with the reality that sales tax is a fading revenue source. But, unlike AB2142 that raised taxes and ignored these other issues, my bill did not even get a vote. Rather, it was heard by the Revenue & Taxation Committee, which, in turn, has sent it to a conference committee on taxes. The committee's stated reason for this referral is that my bill has the potential to impact the state by more than $5 million. Assemblymember Migden's bill also has an impact of more than $5 million--but it will be $5 million out of your pocket, which the liberals do not mind at all.