Proposal Aims to Skirt 2/3 Vote Requirement

(April 7, 2008) The California Chamber of Commerce is rallying opposition against two proposals creating new Internet taxes on consumers and businesses.

AB 1840/AB 1956 (Calderon; D-Montebello) hurt consumers and the economy and will result in taxes on items never taxed before, such as downloadable consumer and business software and other digital products.

Moreover, the legislation is written in a way designed to avoid the requirement that taxes be subject to a two-thirds vote of the Legislature.

“California lawmakers need to decide if the state will be the global leader of the Internet marketplace or the global leader of the Internet tax,” said Kyla Christoffersen, CalChamber policy advocate. “The second option may be the unsettling reality unless AB 1840 and AB 1956 are rejected.”

The CalChamber and a growing list of more than 200 other organizations, companies and individuals have joined together to oppose the proposed taxes.

Digital Taxes

AB 1956 imposes an expansive, unprecedented new Internet tax on Californians who purchase digital media, including software, e-books, music, videos, cell phone ring tones, cable television and movies on-demand.

AB 1840 opens the door to taxation of small online retailers and Internet service companies that sell products to Californians via the Internet.

Combined, the bills greatly increase the cost of doing business for a host of highly coveted technology sector, environmentally friendly California companies that sell digital media or provide digital services.

Currently, less than a third of the states impose a tax on digital media. A number of these states have very different tax structures and populations than California. Most of the states considered comparable to California — including New York, Michigan and Florida — do not have a digital tax.

Bypassing 2/3 Vote

AB 1956 avoids the Proposition 13 requirement for new taxes to be approved by a two-thirds vote by ordering the state Board of Equalization to draft a new regulation to tax digital media without providing underlying statutory authority.

In other words, the bill is labeled as requiring only a “majority vote” because it ignores the fundamental requirement that regulations interpret existing law — which does not tax digital media.

AB 1956 “declares” there is existing authority to tax digital media by manipulating and stretching terminology in current statutes that provide for sales and use tax of “tangible” products.

The CalChamber and other opponents of the legislation are pointing out that digital media is nothing like tangible products, which is why it has never before been subject to tax. If statutory authority existed for the new tax regulation, no bill would be necessary.

“The claim of existing authority to tax digital media is clear grounds for legal challenge,” said Christoffersen. “AB 1956 sets a dangerous precedent for illegal enactment of a new tax by majority vote and an impermissible new tax on services, since delivery of digital media is often a service as much as a product.”

Fundamentally Unsound

The CalChamber and other organizations, businesses and individuals also oppose AB 1840 and AB 1956 because the bundle:

• Shuts out public comment on the new regulation that will implement the new tax. AB 1956 expressly exempts the new unauthorized tax regulation from the regular rulemaking process. 
• Penalizes companies that operate and provide jobs in California. Although digital media is sold to California consumers in the online marketplace from around the globe, federal law prohibits California from taxing any companies that do not have a sufficient nexus or connection to California. Therefore, companies that operate or provide jobs within California are the easiest and most certain targets of AB 1840/1956. In-state companies will be required to collect the new Internet tax while out-of-state companies will not.
• Drives high-quality technology jobs out of state. California has a large, desirable consumer population, but digital media industries are highly mobile and can access California consumers from outside the state’s borders as easily as from within. 
• Will result in a flood of litigation. Enactment of AB 1840/1956 would open up many potential areas of litigation due to the complexity and amorphous nature of digital and e-commerce transactions, the broad, vague scope of the legislation and the lack of statutory authority for the new tax.
• Will ultimately result in fewer tax revenues. Fewer California technology sector companies and jobs and reduced sales will mean lower personal income tax revenues due to lost jobs, less corporate income tax revenue due to lost companies and lost sales income, and smaller property and sales tax revenues due to lost California operations. 
• Overlooks challenges and hardships unique to sales of digital media. AB 1840/AB 1956 place significant burdens on companies already facing challenges unique to the sale of digital media, such as illegal downloads. Increasing the cost of California digital purchases by 8.25 percent will likely encourage more digital piracy. Digital piracy leads to lost jobs, lost sales and lost tax revenues. 
• Stifles California’s pioneering role in digital media and the Internet marketplace. Enactment of AB 1840/1956 will place California squarely on a path to relinquish its leadership role in digital media technology to states like Nevada that will likely never impose such a tax.

Action Needed

AB 1840 and AB 1956 await action by the Assembly Revenue and Tax Committee; an April 14 hearing has been scheduled for AB 1956.

Contact your Assembly representative and members of the committee to voice your opposition to AB 1840/AB 1956.

For more information on the bill or a sample letter of opposition, visit www.calchambervotes.com.

We have just been informed that the Assembly Revenue and Taxation Committee is accepting only individual letters of opposition on each company’s letterhead by 5 p.m. on Monday, April 7.

Please follow the link to a one-page letter you can copy and paste onto your own letterhead. Make sure to sign the letter. Then fax CalChamber (916.325.1272) your letter by 4 p.m. on Monday, April 7. to be listed on the Committee's analysis.

We welcome your faxes after 4 p.m.; however, they will not meet the deadline to be listed on the Committee's analysis.

Staff Contact: Kyla Christoffersen

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