California governor vetoes Internet tax

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by James Evans

(IDG) -- California Gov. Gray Davis on Monday vetoed legislation that would have taxed Internet purchases from click-and-mortar companies.

"In order for the Internet to reach its full potential, as a marketing medium and job creator, it must be given time to mature," said Davis, in a statement. "At present, it is less than 10 years old. Imposing sales taxes on Internet transactions at this point in its young life would send the wrong signal about California's international role as the incubator of the dot-com community."

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Businesses with actual physical operations that also operate online would have been required to charge taxes to in-state residents for online transactions. Davis said the legislation would have singled out companies that conduct transactions online to impose tax collection obligations, which according to California court rulings they are not required to do.

According to the bill sponsor, Assemblywoman Carole Migden, a Democrat from San Francisco, the legislation sought to close a loophole whereby retailers could avoid collecting sales tax by separating on-line activities by moving them out of state, she said in a statement.

"Right now, all California retailers are required to collect sales and use tax," Migden said. "Large stores who can move their online operations out of state should not be able to retain a loophole allowing them to avoid collecting sales taxes."

Under the current system, Migden said, companies like Borders, a retailer with more than 40 stores in California, and Barnes and Noble are allowed to evade their sales taxes for online sales via their dot-com subsidiaries.

"The current loophole leaves small California-based retailers at a competitive disadvantage," she said in her statement. "It is illogical to encourage retailers to move their online operations out of state to stay competitive."

According to legislation, the tax would have brought in $14.1 million annually, $9.1 million in state taxes and $5.3 million in local taxes.

Davis said the state should revisit the issue in three to five years. He also signed legislation that will create the California Commission on Tax Policy in the New Economy, which will examine sales tax issues in relation to technology and consumer behavior.

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California may pass state Internet sales tax
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Tax-free Internet? Don't count on it
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House approves Internet tax moratorium
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Internet Tax Freedom Act

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