Legislation requiring the Board of Equalization to draft a regulation to extend the sales and use tax to digital property failed April 14 in the Assembly Revenue and Taxation Committee, falling one vote short of passage. The bill, AB 1956 (Calderon), deadlocked on a 4-4 vote (Ayes: Charles Calderon, Juan Arambula, Mike Eng and Mike Feuer; Noes: Chuck DeVore, Fiona Ma, George Plescia and Todd Spitzer. Not voting: Mary Hayashi).
Assemblyman Charles Calderon said his bill would not be enacted in time to affect the 2008-09 state budget, but would help raise revenue in future years. The bill directs the BOE to report back to the Legislature within 60 days with a draft regulation reclassifying digital downloads as "tangible personal property," thus extending the sales and use tax to downloads of online music, movies, ring tones, games, books and other digital property. Supporters believe it would generate $114 million a year.
The bill is opposed by BOE Members Betty Yee, Bill Leonard and Michelle Steel, and by Cal-Tax and more than 130 companies and organizations that registered formal opposition. Support has come from government employees' unions, government agencies and the union-financed California Tax Reform Association. Association leader Lenny Goldberg testified that movies purchased online are tangible because they are "perceptible to the senses," adding, "Otherwise, I couldn't watch the movie."
At a recent BOE meeting and at the committee hearing, the board's legal staff predicted that the required regulation would be challenged in court, particularly since AB 1956 provides for the regulation to bypass the standard review and public comment period overseen by the Office of Administrative Law. Assemblyman Juan Arambula said he had concerns about the lack of administrative review, but he opted to support the bill in the committee.
Cal-Tax Vice President and General Counsel Michele Pielsticker testified against AB 1956, telling the committee that online retailers could avoid the tax simply by moving their servers out of state.
Assemblyman Calderon's bill was granted reconsideration, so it may be brought back for another vote.
(Cal-Tax: The lawmakers who did not support the bill indicated that they do not plan on changing their minds, but until the session adjourns, legislation is never 100 percent dead.)
Cal-Taxletter April 18, 2008
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