State to Study Web Sales Tax

SACRAMENTO â€”  State officials moved closer Wednesday to charging sales tax on consumer items purchased from out-of-state online and catalog companies, a requirement that could ultimately generate $1.8 billion annually for strained government coffers.

A bill that would make California part of a consortium of 36 states working on the issue breezed through a Senate committee Wednesday with bipartisan approval. And state tax regulators voted to begin limited participation with the consortium, effective immediately.

“California isn’t able to collect billions of dollars that people currently owe,� said Sen. Debra Bowen (D-Marina del Rey), author of SB 157, which would make California a full voting member of the Streamlined Sales Tax Project consortium.

Bowen said the current system “hurts the people who shop locally and are forced to pick up a larger share of the tab for those critical services that everyone in California relies on.�

Some Republicans, however, expressed concern that collecting the taxes would hurt online and catalog sales. And they also said the consortium may be seeking solutions that would undermine some of California’s laws.

U.S. Supreme Court decisions have made it impossible for states to require out-of-state companies to collect sales taxes without an act of Congress. Congress has so far failed to act out of the same concern expressed by the court: Forcing retailers to collect the taxes for thousands of state and local tax jurisdictions, each with its own set of complicated rules, would be too much of a burden.

The Streamlined Sales Tax Project is an attempt to simplify the taxing process, with every jurisdiction adopting the same rules so retailers would find it easier to collect the tax. While the tax rates could vary from place to place, details such as the way products are categorized for tax purposes would be made uniform.

States that belong to the consortium would enact legislation adopting the new tax codes, and businesses would be asked to participate voluntarily until Congress acts. Supporters of the project say that if Congress fails to act, the simplification of the tax codes would put the states on a firm footing to go back before the Supreme Court on the issue.

If the project succeeds and California ultimately changes its tax codes to conform with it, the state could begin collecting sales tax on out-of-state purchases made online and through the mail by early 2005.

While that is too late to help plug the current budget gap of as much as $35 billion over the next 16 months, it would help the state close its chronic deficit -- the $15 billion by which spending is projected to surpass revenue every year without long-term solutions.

California has resisted joining the project for three years. The Legislature voted to join in 2000, but the bill was vetoed by Gov. Gray Davis, who has since indicated that he would consider signing it.

Members of the Board of Equalization, which has broad authority to determine how the state’s tax laws should be enforced, passed a resolution that for now makes California only an observer of the consortium. Three other states are part of the group as observers.

The resolution was pushed by state Controller Steve Westly, who earned millions of dollars as an executive at the online company EBay. Westly said he supports the Senate bill that would make California a full participant in the group.

“I believe California has sat on the sidelines of the [project] long enough,� Westly said. “There is a national momentum, and we should not let the interests of the fifth-largest economy in the world go unrepresented.�

Westly and other supporters stressed that they are not seeking a new tax, but rather to collect sales and use taxes already owed by California residents. Current law requires residents to pay those taxes even though the U.S. Supreme Court says the retailer does not have to collect them.

“It is money owed to California state and local government, and much-needed funds,� Westly said. Failing to collect the money, he said, “threatens the integrity of the sales and use tax law.�

While the bill received Republican support in the Senate Revenue and Taxation Committee, Republicans on the Board of Equalization opposed having California join the project.

“I think there is a flaw in their whole program,� said board member Bill Leonard, who speculated that forcing retailers to collect the tax could drive some companies out of business.

Another Republican board member, Claude Parrish, warned that ultimately signing on to all of the rules adopted by the consortium could turn California’s tax code upside down and undermine the authority of state lawmakers.

“This could significantly diminish the role of this constitutionally elected board,� he said.

Bowen noted that participating in the group is only a first step, and that the tax code in California could be changed only through further action of the Legislature. She said the idea is to simplify the system of collecting taxes, not complicate it.

In testimony before the Senate committee, she explained that once the system is adopted, companies would be able to type the ZIP Code of a buyer into their own computers and see the sales tax owed. The cost of the software that does this and other costs associated with collecting the tax would be subsidized by the state, she said.