California E-Commerce Sales Tax Reduction Act

By Scott Gruendl

Reduces sales tax for California Internet sales by up to 50%, allows for legal agreements with other states to collect sales tax.

Legislative Proposal 1: The Economic Stimulation and Environmental Protection Plan

Premises:
1. Internet commerce is on the rise. California's current system of sales tax collection is not adequate to prevent the loss of increasing sales tax revenue base as more consumers purchase on-line and out-of-state.

2. No one wants to pay tax. It is assumed that consumer groups will be against this policy because some people who previously avoided sales taxes through internet transactions would now be subject to a reduced sales tax. Those advocates of avoiding sales tax do so at the expense of our communities, who rely upon those taxes for crucial state, county and local services.

3. Under the current moratorium of new taxes, loss of sales tax revenue could threaten state, county and local government, school, police and fire services in a surprisingly short period of time, given the exponential growth of e-commerce. Under this threat, it is extremely likely that the federal government will take advantage of the opportunity to attempt to usurp the sales tax administration process from the states under the guise of regulating interstate commerce.

4. The federal government should not take control of the sales tax process. If it does, states would essentially be forfeiting their right to govern the revenue produced by their individual state to the federal government, compromising and essentially forfeiting the states' rights and the rights of the communities therein. Even though Internet transactions may involve two states and thereby fall under one definition of federal jurisdiction, the sales tax application and administration process is the fundamental right of each individual state, and not the federal government.

5. Following precedent, California will again lead the nation in making efforts to work cooperatively with other states: this time to create a mutually beneficial system of collecting sales tax. California will take the initiative to act proactively, for the benefit of our rights to govern how our tax revenues will be spent to benefit our communities, our schools, our citizens and our states' prosperity as a whole.

6. Unlike physical transactions, e-commerce by definition requires the use of computers and Internet connectivity to record and transmit all elements of the on-line sales transaction. This provides the opportunity for a simple and cost effective method of transmitting, tracking and collecting transactional information for the application and distribution of interstate sales tax which has never before been possible.

7. California law needs to embrace e-commerce for several important reasons in addition to the financial benefits its stands to gain from intelligent sales tax administration policy. Consider the following facts:

 E-commerce reduces physical travelling because items that a consumer previously traveled to a store to purchase can now be sought, viewed, comparatively priced and purchased from their home or office, and shipped directly to their residence. The more rural the area, the farther residents would have to travel to find a physical store, and therefore the greater the benefit realized through e-commerce. This shift in purchasing methods creates several benefits to the people of State of California:  Reduced fuel emissions being released into the environment, improving air quality.  Reduced vehicle wear and damage to our streets, highways and state infrastructure, creating cost savings.  Reduced demands to widen existing freeways, creating a cost savings.  Reduced travelling increases individual, business and community productivity, allowing more time for work, families or recreation, encouraging overall improvement in people's quality of life.  Reduced transportation also reduces the consumption of gasoline, preserving our preserving our limited supply of fossil fuels and other natural resources.  Traveling less, people will feel closer to their local community, thereby improving local community unity and increasing interaction between local residents.

 On-line sales transactions create a significant reduction in paper use. Because the purchase forms and catalogs are provided online, the paper waste associated with the standard mass catalog mailings is reduced, resulting in added value and protection to our trees and ecological system.

-The postal system benefits from increased e-commerce in several ways:
- The USPS currently delivers corporate promotional circulars, catalogs and flyers for highly discounted bulk rates, which are less profitable to the USPS than other forms of delivery. E-commerce promises to reduce the number of circulars being mailed because companies can reach their consumers through the Internet more cost-effectively.
- E-commerce encourages shipment of products directly to consumers, increasing the number of parcels handled by the postal system, and more parcels means more revenue to the postal system.

- E-commerce promotes competition and consumption because consumers have easy access to a variety of sources, unlike physical shopping where the consumer would have to spend significant time going from store to store to comparatively shop for their needs. Competition has the effect of reducing consumer prices overall, allowing consumers to make more purchases with their savings, thereby stimulating the economy.

- E-commerce encourages virtual storefronts that can operate without possessing physical inventory, reducing the number of warehouses required by industry. This also has the added benefit of reducing the number of trucks on our highways transporting products to stock those warehouses. This also has a positive impact on local land use decisions related to the industrial land and housing.

THE CURRENT LAW AND THE CURRENT PROBLEM

California's current sales tax rate is 7.25% (although some jurisidictions charge up to 8.25%). Other states vary in their rates of sales tax, a variance that is the fundamental right of a state to determine on their own behalf.

If a California resident drives to another state (i.e. Colorado) and buys an item (i.e. a television), he pays the Colorado sales tax rate (i.e. 5%). When he gets back to California with the TV, he is supposed to voluntarily report that purchase to the California Board of Equalization along with sending a check for the California Use Tax. The amount of the Use tax is the difference between California's sales tax rate and the tax rate of the state in which the item was purchased. In this example, the California resident is supposed to send a check to the BOE for 2.25% of the purchase price of his TV.

No one ever does this.

If a California resident purchases an item over the Internet from another state, and the on-line business does not possess a California sales permit, then no-sales tax is charged by the company because they are not required to do so under current law. The consumer pays no sales tax at the time of purchase, and instead is supposed to voluntarily report the purchase to the Board of Equalization along with a check for the Use Tax, which in this case would be the entire 7.25%.

No one ever does this, either. As a result, the State of California loses revenue every time a California resident purchases on-line out-of-state.

The BOE reports that there is virtually no way to enforce the Use Tax because there is no way to know the transactions taking place in other states. Only during audits of extremely large purchases by businesses would the BOE even check with another state regarding the application of a sales or use tax.

The loss of revenue from the Use Tax is an acceptable loss as long as most transactions are still physical transactions, subject to the California sales tax, which is sufficient revenue to fund California's municipalities. However, as more consumers buy more things over the Internet from other states, California stands to lose a dangerous percentage of its crucial revenue, and the current Use Tax system does nothing to prevent this.

The Proposed Law - A Summary

This Bill, referred to as the California Internet Sales Tax Reform Act (CISTRA), would do the following things:

1. Create a commission adjunct to the Board of Equalization to oversee the implementation of this internet sales tax reform plan and coordinate with other states as necessary to effectuate the plan and to interact with Federal agencies as needed;

2. Mandate that for all on-line transactions, California businesses must charge California sales tax at the appropriate rate regardless of where the consumer lives. Mandate that a copy of the relevant transaction information for tax purposes be sent to the BOE on-line transaction database. While excluding private and personally identifying information like customer's name and payment methods, required information includes the sale date, sale amount, residence state of the consumer, and the applied sales tax rate by the business. This information properly managed allows the BOE to track and collect all due sales taxes and distribute them appropriately (see below).

3. Vary the sales tax rate collected by California on-line retailers based upon the incentives in this plan, as follows:
- All on-line transactions would be taxed, but at a reduced rate. All on-line transactions will receive a sales tax reduction of 1.5% off the standard California sales tax rate (the applied tax rate would be a maximum of 5.75%), regardless of the state where the consumer is located or any other factor.
- On-line sales to California residents would receive an additional 1.5% reduction in the sales tax rate (their tax rate would be 4.25%).
- If a California on-line retailer applies to the BOE for and is granted "Telecom" status, they can reduce their applied sales tax by another 1% (California residents would be taxed at 3.25%, non-residents at 4.25%).

4. Provide the BOE with a methodology for granting "Telecom" status to California businesses. In order to be awarded Telecom status, a business must demonstrate through satisfactory documentary evidence that at percentage of their overall employees utilize telecommuting practices for a certain percentage of their work, as follows:
- For the first 2 years of the plan, at least 25% of employees must telecommute at least 33% of the time;
- Thereafter, at least 25% of employees must telecommute at least 50% of the time.

5. Provide financial incentive to other states to establish a similar program by offering them a share of the on-line California sales tax revenue. Each state that enters an agreement with California would then receive .5% of the purchase price as their benefit. (I.e. in the lowest tax scenario regarding a sale to a California resident taxed at 3.25%, 2.75% would be retained by California, and .5% would be distributed to the state of residence of the consumer.

Example:

Mary, a resident of Texas, buys a computer over the Internet for $1,000 dollars from a California Telecom on-line retailer. Under current law, the California business does not charge any sales tax, resulting in no sales tax revenue to California or Texas by the sale and no tax at all paid by Mary. Under Texas law, Mary probably is supposed to report the purchase and pay Texas a Use Tax, comparable to California's use tax formula. However, current law provides little or no way to enforce the Use Tax, and most citizens do not even know they are supposed to report the sale or pay a Use Tax. Most likely, Texas will not see any revenue from Mary's purchase.

Under this Act, in this example Mary would be charged a sales tax rate of 4.75% because she is an California non-resident, and bought the computer from a California "Telecom" on-line retailer. Of the $47.50 sales tax applied to the transaction, $5 (.5%) would be distributed to the Texas BOE under the Agreement between the states, and California would retain $42.50. Both states benefit financially from this arrangement, whereas under current law both states would not receive any revenue from the transaction.

Under the reciprocal portion of the Agreement with Texas, if the scenario were reversed, Texas would require the Texas business to impose a Texas sales tax upon the California consumer, and California would receive the $5 distribution. Again, this benefits both states because under current law they both would receive no tax revenue at all.

The California E-Commerce Sales Tax Reform Act

Sponsored by Scott Gruendl (D) California Senate District 1 Purpose: An Act to ensure California financial independence; specifically, the Act is designed to achieve the following goals:
- Prevent dangerous loss of state revenue due to increased E-commerce tax loopholes;
- Prevent the federal government from usurping California's right to govern the sales tax process;
- Stimulate the California economy;
- Create California jobs;
- Increase wages and skills;
- Provide additional tax revenue to the state;
- Provide a state-wide competitive advantage for California-businesses over businesses in other states;
- Provide an incentive to California companies to utilize e-commerce and telecommuting technologies in their operations;
- Reduce unnecessary land development, construction and vehicle traffic;
- Prolong the life of our environment and natural resources.

Summary: This Act replaces certain practical applications of the current California Use Tax with an authorization to enter interstate agreements for collection of sales taxes on interstate e-commerce (Internet transactions involving direct shipment and multiple states). To accomplish this goal, a commission adjunct to the Board of Equalization (BOE) is created to implement this plan and establish agreements with other states. A multi-layered e-commerce sales tax reduction plan is established to maximize effectiveness and revenue potential. A new BOE tax status is created called "Telecom" status, which recognizes and provides further tax-based incentive to companies that utilize telecommuting practices. A web-based database is created for simple data collection for tax reporting purposes.

I Creation of the Commission on E-Commerce Sales Tax (CEST)

1. There is hereby created the Commission on E-Commerce Sales Tax, which may be referred to as "CEST" or the "Commission".

2. CEST shall comprise 5 individuals, two of whom are appointed by the Governor, two of whom are delegates from E-commerce industry selected by the Governor and confirmed by the Legislature, and the last is a representative from the BOE, recommended by the BOE and approved by the Governor..

3. Each member of the Commission shall hold his position for three years, and their terms shall be staggered so that no more than two commission seats shall be up in any one calendar year.

4. This Act may be cited as "CESTRA", or the California E-Commerce Sales Tax Reform Act.

II Purpose of CEST

1. CEST's mission is to implement the mandates of this Act, and to coordinate with other states to enforce the provisions of this Act.

2. CEST has the authority to enter into Agreements with other states, pursuant to this Act, for the coordination of the application and collection of state sales taxes.

3. CEST's goal is to ensure a steady and growing revenue stream to California arising from e-commerce transactions, and to ensure that on-line sales taxes are applied properly by California businesses.

4. CEST shall create and oversee the process whereby California businesses can apply to receive "Telecom" status.

5. CEST shall endeavor to publicize this Act and the new policies through development of an effective public awareness campaign designed to maximize compliance with the Act and enhance public support.

6. CEST shall lobby and solicit cooperation of the federal government to remove any federal restrictions that would prevent this Act from being implemented.

III Identifying "Telecom" Status

1. Any California business engaged in e-commerce may apply to the BOE for "Telecom" status.

2. In order to be awarded Telecom status, a business must demonstrate through satisfactory documentary evidence that at percentage of their overall employees utilize telecommuting practices for a certain percentage of their work, as follows:

a. For the first 2 years of the plan, at least 25% of employees must telecommute at least 33% of the time;

b. Thereafter, at least 25% of employees must telecommute at least 50% of the time;.

2. Telecom status may only be awarded for a period of 1 year, at which time the status expires and must be renewed by the business by submission to the BOE of an Application for Telecom Status Renewal. The renewal process requires applicant to demonstrate that proper telecommuting percentages have been achieved.

3. Any person or business that falsifies documentation to improperly obtain Telecom status shall be guilty of felony fraud.

4. CEST shall issue an authenticated certificate to all Telecom status businesses, which shall clearly state thereon the date of its expiration.

IV Definition of E-Commerce Transactions and California Business

1. An E-commerce transaction is defined as the Sale of any goods or services over the Internet, which sale would otherwise be taxable if sold physically within California.

2. E-commerce includes all subject transactions over the Internet, regardless of where the businesses or buyers are located.

3. In order to qualify as an E-commerce transaction, the buyer must be able to do both of the following activities over the Internet:

a. Place an order for products or services;

b. Request that goods or services are delivered to them;

4. A California Business is a business which meets any one or more of the following criteria:

a. Has any physical presence in California;

b. Has a web site hosted on a server that is located within California;

c. Sends agents or representatives to make sales;

d. Is incorporated under the laws of California;

e. Has filed a fictitious business name statement in any California jurisdiction;

f. Has a sales permit for California;

g. Has a license to do business within California;

5. If a business has operations in several states including California, and if the other states have an agreement with California as described in this Act, then the business may elect which state it shall be regulated by for the purposes of sales tax. However, if the business elects a state that either has no sales tax or has no agreement with California, then it shall be treated as a California business under this Act.

6. If a business disputes its classification as a California business under this Act, then it may appeal to the Commission. If the Commission determines that the business did in fact collect and forward sales taxes for another state, then the business may be reclassified as a non-California business.

V Imposition of Sales Tax on E-Commerce

1. All California businesses are hereby required to collect California Sales Tax on any transaction conducted over the Internet.

2. Any business that fails to comply with this Act shall be subject to a fine of up to $5,000 per day for every day they fail to comply with this Act, regardless of the volume of sales conducted on-line by the business.

3. The amount of tax to be collected by the California business under this Act varies, based upon the incentives of this section.

4. The Commission shall create, or pay for the creation of, a computer program (i.e. Java-script or similar internet-friendly code) that it can distribute worldwide to simplify the sales tax calculation, application and reporting process. The Commission shall make this software available on its web site.

a. The software will be licensed for free to all businesses within California and shall be licensed for under $10 for any person or business outside of California.

b. Any licensee may install the software into their E-commerce web site and / or adapt the software to work properly with their web site.

c. The software will be a simple script that automatically calculates the appropriate sales tax to collect on the transaction based upon the factors identified in this Act.

d. The software will transmit certain transaction information to the BOE's On-Line Sales Tax Database (OSTD). Information required to be included is as follows:
- Business Name
- Business Address
- Business Web Site Address (URL);
- Sale Date;
- Item(s) sold;
- Sale Amount;
- State of Residence of the Consumer (i.e. shipping address);
- Telecom Status (Yes / No);
- Tax rate applied
- Amount of tax collected;

e. The software will specifically exclude from transmission to the OSTD any private or personally identifying information about the consumer, including but not limited to the consumer's name, birth date, social security number, address (other than the State) or payment information. f. The Commission may determine whether businesses may be permitted to develop their own software to fulfill the purposes of this Act, or whether they are required to utilize the software provided by the Commission.

5. The rate at which e-commerce transactions shall be taxed under this Act shall vary, as follows:

California Consumer is a Applicable Business Status California Resident Sales Tax Rate Non-Telecom No 5.75% Telecom No 4.75% Non-Telecom Yes 4.25% Telecom Yes 3.25%

6. California businesses shall forward all collected sales taxes to the BOE in the same manner and at the same intervals as they are currently required to forward traditional California sales taxes. However, all on-line sales taxes shall be identified separately from traditional taxes for tracking and reporting purposes.

VI Interstate Agreements Regarding Sales Tax

1. Under this Act, CEST is authorized to establish agreements with other states as long as such agreements are within the following guidelines:

a. Any agreement must be reciprocal in nature;

b. Any agreement must be voted and approved by a majority of the Commission;

c. In any agreement with another state which provides that California will share a portion of its sales tax revenue on e-commerce transactions with the state in which the consumer is a resident, the amount of the shared portion of tax shall not exceed .5% of the transaction amount.

d. The Commission may license its developed software to other states for their distribution to businesses within their state, at such a fee as the Commission should determine appropriate in the context of the agreement.

VII Assertion of State's Rights

California hereby reaffirms and restates its Reserved Right to impose and collect its own sales taxes, and specifically denies this right to the federal government. Nevertheless, in addition to its other duties, CEST shall be charged with seeking and negotiating federal endorsement of and cooperation with this Act, and with obtaining federal assistance to engage the cooperation of as many other states as possible to participate.

VIII Effective Dates of the Act

1. Upon this Act's passage, the Governor shall appoint 5 Commission members, within 4 months of the passage of the Act.

2. California businesses will be required to implement the sales tax software described in Section V, Paragraph 4, above, and begin transmitting e-commerce sales tax information to the OSTD six months after the creation of CEST.

3. If, after six months of development, CEST has not created the software and / or the OSTD as described in Section V, Paragraph 4, above, then the date of the tax implementation under this Section may be delayed by a majority vote of the Commission; additional delays may be authorized by a majority vote of the Commission, but no delay may exceed six months in duration.

IX Commission Funding and Policies

1. The Commission shall be funded out of the State's General Fund.

2. The Commission shall receive a budget of $2,000,000 for its first year of salaries and operations, to be budgeted by the Commission.

3. The Commission is empowered to hire direct staff or vendor services as needed to accomplish its duties within the limitations of its budget.

4. The Commission shall have the power to enact rules and internal policies for making decisions and for the functioning of its daily operations, as long as such rules and policies are consistent with this Act and with laws of California and United States of America.

5. Future annual budgets shall be determined by proposal of the Commission to the State Legislature in accordance with established budget allocation procedures.

X Changing Commission Members

1. The Commission shall make internal procedures for the removal of any Commission member by unanimous vote of the other Commission members only after a fair and public hearing on the matter.

2. The two positions filled by appointment of the Governor are held at the discretion of the Governor, who during their term may replace them at his sole discretion.

3. The two positions representing e-commerce shall that of consumer advocates, appointed by the Governor to serve a term of two years each, and confirmed by the Legislature, who may recall such elected members of the Commission in the manner provided for by law.

4. The Board of Equalization shall elect one of their members to the commission for each term and may recall said appointment by procedure prescribed by their governance.