Calif. governor signs compromise on Internet taxes

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SAN FRANCISCO (AP) — A political fight over whether Internet retailers should collect sales tax will move from statehouses to Congress after California Gov. Jerry Brown signed a bill Friday that represents a compromise among Amazon.com, traditional retailers and lawmakers searching for ways to raise revenue.

By signing AB155, Brown delayed tax rules implemented earlier this summer as part of the state budget package until at least September 2012. The reprieve will give online and traditional retailers time to lobby Congress for a national standard on collecting sales tax for online purchases.

“It’s time for Washington to follow our lead and forge a bipartisan national solution,” Brown said Friday.

If that effort fails, Amazon has agreed to start collecting sales tax from California customers. The budget bill signed previously by Brown forced more online retailers to collect the state sales tax effective July 1. The move prompted Amazon to cut ties with some 25,000 affiliate businesses in California and spend more than $5 million to collect signatures for a 2012 referendum drive to repeal the law.

The compromise bill will cost California an estimated $200 million in tax revenue during the current fiscal year but helps both sides avoid a costly election contest next year and the possibility of legal challenges.

Under the deal, the retailing giant will rekindle its relationship with its California affiliates and end its referendum drive.

“We were able to avert what I think would have been a real negative for California, and that would have been a referendum on the November ballot pitting Amazon against the retailers and leading to, undoubtedly, an unproductive result,” said state Senate President Pro Tem Darrell Steinberg, a Sacramento Democrat. California was among a growing number of states that saw taxes on Internet sales as a way to help close budget deficits.

Consumers are required under state law to pay sales tax when they order online from companies out of state, but the tax is virtually impossible to enforce without the cooperation of the retailers. Customers rarely pay.

Traditional retailers, from Wal-Mart to local business owners, say the inability to police taxation on the Internet creates an uneven playing field, with online retailers gaining an unfair advantage.

A 1992 U.S. Supreme Court ruling in a case involving a mail-order retailer says a business must only collect state tax from customers if it has a physical presence in the state where they live, such as a retail store. Several states responded by trying to broaden the definition of physical presence. At least six states had done so by 2010 while nine more, including California, launched similar legislative attempts this year.

California’s version, signed earlier this summer, imposed tax-collection duties on a company if it used marketing affiliates in the state to refer customers or if it had sister companies in California, such as Amazon’s Silicon Valley company that developed the Kindle electronic book reader. Internet retailers such as Amazon and Overstock.com said that violated the Supreme Court ruling.

Amazon and the California Retailers Association worked out the compromise in the final days of the legislative session to postpone the tax measure and allow the online and traditional retail lobbies to make a unified push in Washington for a national standard.