California Assembly Passes Measure To Tax E-Commerce

The California Assembly last week by a slim margin approved a bill to tax e-commerce purchases, so long as the companies selling products have a physical presence in the state.

GRAY DAVIS: California's Democrat governor opposes online tax for fear of hampering e-commerce.

The proposal still must pass through the California Senate and across Gov. Gray Davis' desk. Davis, a Democrat, opposes taxing online transactions for fear that such taxes will hamper the phenomenal growth of e-commerce, sources said. Given that his state is home to many U.S. high-tech and e-commerce companies, Davis' stance on taxation comes as no surprise, they added.

The measure passed in the Assembly with the minimum number of votes: 41, all from Democrats. Nine Democrats abstained.

The bill helps clarify a thorny issue: physical presence, or nexus. Under the proposed legislation, companies with a physical warehouse, distribution center or other brick-and-mortar presence would have to charge consumers sales tax.

However, under the bill, companies whose Internet traffic happens to flow through a server that resides in California would not be required to levy taxes on online transactions.

Some industry watchers commended the Assembly's move.

"What California did is not unreasonable at all," said David McClure, executive director of the U.S. Internet Industry Association, a lobbying group in Washington, D.C. "We are interested in fairness, and this puts online and offline companies in California on equal footing, which is all we've ever asked for," he said.

Jonathan Zuck, president of the Association for Competitive Technology, another lobbying concern in Washington, disagreed. He described the bill as "an attempt to end-run around the intent of the moratorium" on taxing e-commerce transactions.

The U.S. House of Representatives recently voted to extend the moratorium through October 2006. The legislation now is up for debate in the U.S. Senate.

"The Internet companies don't get the benefits of things like street cleaners and traffic cops" that brick-and-mortar stores do, Zuck said.

Observers with a stake in business-to-business e-commerce said they believed some sort of tax levied on e-commerce transactions was inevitable, but there must be an effort to make consistent each state's specific tax policies.

"I think it is necessary," said Ted DeSilvestre, chief technology officer of Conscium Inc., a Mountain View, Calif.-based ASP specializing in collaboration and workflow applications.

"The issue is states deciding whether to tax businesses with a physical presence. With unequal treatment in other states, that could be a recipe for trouble," DeSilvestre said.

"We can't exist [forever] in a world where brick-and-mortar stores are taxed and Internet transactions are not," said the Internet Industry Association's McClure. "If you pay tax in the grocery store for bread, then you ought to pay tax online [for bread], as long as the business has nexus in [your] state."CRN

For more on Internet taxation, go to: www.crn.com/business