On Friday, Sept. 23, 2011, California Governor Jerry Brown signed two newsworthy bills that he said would help to create new jobs within the state. The first involved the financing of preparations for the America's Cup sailing races to be held in San Francisco in 2013. The second would require out-of-state internet retailers, like Amazon.com, to collect sales tax on their purchases by California customers.
AB 664: Financing for Improvements Related to the America's Cup Races
The America's Cup sailing races are initiated by a sailing team challenging the holder of the coveted silver trophy cup. In 2010, Société Nautique de Genève, the Swiss team known as "Alinghi," was challenged for the cup by Golden Gate Yacht Club (GGYC). Backed primarily by Larry Ellison of Oracle, the GGYC team races under the name "BMW Oracle Racing." Ellison's GGYC team managed to win the race and not long after, they were challenged for the cup by Italian team Mascalzone Latino. This kicked off a world series of America's Cup events which will take place over three years (2011-2013) and will culminate with the final America's Cup Match in 2013 in San Francisco. The cup match is expected to generate over a billion dollars in economic activity and the city is preparing for waterfront improvements including a new cruise ship terminal and jumbotron television screens to be installed strategically around the city to keep spectators from rubber-necking in sensitive shoreline habitat.
I actually attended the America's Cup final races in Auckland, New Zealand in 2003. I boarded a ferry to try to get closer to the action. I can tell you that there is not much to see from the shore. There is also not much to see from a crowded spectator's boat. I spent most of the time watching the event on the television inside the ferry. My advice, for the benefit of San Francisco's eco-system and also for you the potential spectator, is to plan to watch the televised footage of the races. Then head down to the marina at the end of the day to celebrate and talk sailing with the teams and other ardent fans.
AB 155: Sales Tax Collection and the Amazon Compromise
Also signed by Governor Brown on the same day was AB 155. The new legislation requires Amazon.com, and other internet retailers, to collect sales tax on purchases by California customers made through their California affiliates, required pursuant to ABX1 28, the budget trailer bill. The compromise made is essentially with respect to timing. Under the bill, online companies will have until July 2012 to persuade Congress to create a national system for collecting sales tax in the context of online sales from out-of-state retailers. If they are unsuccessful, then the obligation to collect tax on the internet purchases to in-state residents will apply. But, if Congress does act to create a national system for collecting sales tax, California will acquiesce to that law with collection beginning in January 2013.
Earlier this year, legislators acted to revise Cal. Rev. & Tax. Code § 6203. Under the revised law, effective July 1, 2011, an out-of-state retailer may be found to have substantial nexus with California, and thus subject to tax, by virtue of its affiliate marketing agreements. If a vendor places a link on a California affiliate's blog or website, the vendor is included in the definition of "retailer engaged in business in the state," under the revised law, and the obligation to collect sales tax applies (subject to monetary thresholds being met). Amazon's reaction to this new law was to spend millions of dollars to try to garner support for a referendum that would overturn the law (in California, anyone can arrange a public referendum with sufficient signatures of support). Prior to the deal struck with Amazon via the new bill, lawmakers were attempting to re-pass the law enacted under ABX1 28 as an urgency bill with two-thirds approval so that it could not be challenged by a referendum. See "Amazon's Tax Dodge: Online retailer takes advantage of California's dysfunctional politics," The New York Times, September 7, 2011. In connection with final AB 155, Amazon has agreed it will not go forward with the referendum.
The prospects for a national system of sales tax collection are unclear. The political climate in 2010 suggested that consensus for such a system was very unlikely. See Transcript of Tax Analysts' Conference on 'Amazon' Laws, 2010 TNT 44-70 (Tax Analysts Mar. 8, 2010). Legislation has been introduced in both houses of Congress to create a national system, but as with any legislation, especially involving something so controversial, the prospect for passage is not known. The proposed "Main Street Fairness Act," H.R. 5660 (introduced by by Reps. John Conyers, D-Mich., and Peter Welch, D-Vt.) and SB 738 (introduced by Sen. Dick Durbin, D-Ill.), would certify the Streamlined Sales and Use Tax Agreement across the country and provide states with the clear authority to require retailers to collect owed sales tax. Small businesses would be exempt from the collection of sales tax under the bill and there would be provision for compensation of startup administrative costs associated with collecting sales taxes.
Although it seems like a tremendous sacrifice for the state of California to agree to the safe harbor (the previous measure to require sales tax of online sellers operating via in-state marketing affiliates was expected to general $200 million of revenue for the state), the possibility of a national solution to make things simpler for all players, and a conclusion to Amazon's strong-arm procrastination, is very appealing to this writer. It will be very interesting to see what position Amazon may take if it is not successful in its efforts to persuade Congress to craft an elegant legislative solution.
Discover the features and benefits of LexisNexis® Tax Center
For quality Tax & Accounting research resources, visit the LexisNexis® Store