The Business Taxes Committee held an informational hearing regarding use tax nexus at the July 8 meeting of the Board of Equalization. Richard Prem, Vice President of Taxes for Amazon.com was the featured speaker, presenting a PowerPoint regarding Amazon's business model and its contributions to small business, technology and the tax system. Mr. Prem was accompanied by Ernie Dronenburg, a former Board of Equalization member.
Board staff opened the hearing, explaining the law in California regarding use tax nexus. According to an information paper issued by board staff, "if a[n out-of-state] retailer has sufficient business presence within the terms of Section 6203, that retailer is required to register with the Board of Equalization and collect the applicable use tax on all sales to California consumers." The paper explained that the physical presence of either property or sales personnel in the state is required before the state may impose a use tax collection duty.
A recently enacted New York statute expanding use tax nexus to Amazon based on its associates program was also a hot topic at the hearing. Under the New York statute, sellers of tangible personal property in New York are presumed to be vendors subject to a tax collection duty if: (1) The seller enters into an agreement with a New York resident whereby the resident receives remuneration for referring potential customers to the seller by link or by other means; and (2) The cumulative gross receipts of the seller to New York customers resulting from these referrals total more than $10,000 during the preceding four quarterly sales tax periods.
The New York statute is said to have targeted Amazon's associates program, whereby Amazon associates receive a fee based on sales resulting from links to Amazon on the associate's website. That law is currently under challenge in the New York Supreme Court by Amazon and Overstock.com. In addition to filing suit, Overstock withdrew its New York affiliates program, while Amazon has begun collecting use tax and remitting it to the state of New York.
Staff differentiated the New York law from current California law, stating that for California to impose a use tax collection duty on out-of-state retailers, the affiliates must have engaged in some sort of selling activity with the express or implied knowledge of the out-of-state retailer. Absent evidence of this type of activity, the state does not have the authority to impose a use tax collection duty on the retailer.
According to Mr. Prem, Amazon has had over $14 billion in sales and created 17,000 jobs since its inception in 1994. Over 35% of items purchased on Amazon are purchased from third parties, many of them small businesses that can't afford to create their own website. One-half of Amazon's revenues are derived from outside the United States. Also of interest, was the fact that Amazon provides an optional sales tax calculation service to its third-party sellers upon proof of seller registration in a particular state.
Board Chairwoman Dr. Judy Chu questioned whether Amazon tracks the remittance of sales tax by its third party sellers. "We don't track to make sure they've made payments, but do make sure they're registered," said Prem. When questioned whether information regarding third-party sellers in California is shared with the Board, Mr. Prem responded that under Amazon's privacy policy, they do not share such information on a voluntary basis.
Lenny Goldberg, representing Northern California Independent Book Sellers Association, argued that Amazon's California associates program should subject Amazon to nexus in this state due to alleged selling activity on behalf of Amazon by the associates. He lauded the New York statute, arguing that the only real downside to enacting a similar California statute is litigation over the issue of whether to cease and desist forcing use tax collection. "The tax is legally collected and remitted," …"Under Quill the only question is undue burden," he said.
Michele Pielsticker, Vice President and General Counsel of Cal-Tax, stated "We're concerned that what Mr. Goldberg is proposing would result in litigation as it has in New York. We look at Quill as standing for the proposition that a physical presence is required in the state to impose a use tax collection duty. Worse than litigation we believe that it could lead businesses to leave the state altogether, as with Overstock.com, who withdrew its New York affiliates in response to the New York statute."
Kyla Christoffersen of CalChamber concurred with Ms. Pielsticker and added "Currently nexus issues are being looked at on the federal level. We believe that is the more appropriate forum for these issues, otherwise competitiveness issues are unavoidable."
Board Member Betty Yee asked board staff whether active solicitation by affiliates would constitute nexus under the current California statute. Board staff responded that some degree of knowledge is required by out-of-state retailers, whether actual or constructive. Board staff concluded that it lacked any evidence of such a relationship between Amazon's associates and Amazon in California.
(Cal-Tax: Use tax
nexus continues to be debated at the state and federal level as we conduct more
commerce electronically. Under the Supreme Court's Quill decision, however, an out-of-state retailer must have a
physical presence in a state before the state can impose a use tax collection
duty.)
Cal-Taxletter July 11, 2008
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