A judicial loophole allows online-only retailers (such as Amazon.com) to avoid the rules of sales tax collection, resulting in a loss of $1.1 billion in taxes on internet and mail order sales last year in California according to the State Board of Equalization. The board estimates that enforcing sales tax collection on internet companies would result in an additional $786 million to the state general fund and $359 million to local governments. Over 20 years ago, at the dawn of the Internet, the government decided to exempt online retailers from collecting sales taxes in an effort to increase Internet sales. However, now that Internet companies are thriving, some states are considering ending the sales tax collection exemption.
In January, the California Legislature introduced Assembly Bill 153 to require some out-of-state retailers to collect taxes for California. Under current California law, out-of-state businesses selling goods to Californians through the internet or by mail order are not legally obligated to collect California sales tax at the time of sale unless the retailer also has a physical presence in the state.
If passed, Assembly Bill 153 will require certain out-of-state businesses selling taxable goods totaling $10,000 or more to California each year to collect all sales taxes and submit them to the state. However, the law will only apply to businesses engaging in business with an affiliate residing in California because federal law does not allow states to cross state lines.
Amazon is the main target of the legislation because it is the number one internet sales company in the nation with $34.2 billion in estimated sales in 2010. The majority of the other top 100 Internet sales companies that are physically present in California already collect sales tax.