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Internet Taxes: Circumventing The Constitution?
The California state legislature may have handed off an Internet tax bill to Gov. Gray Davis, D, for approval, but some groups are questioning the measure's constitutionality.
The California Assembly passed the bill, A.B. 2412, by a 42 to 31 last week. The bill would require companies that have physical store locations in California that already collect the state's 7.25 percent sales tax to also collect the sales tax from affiliated companies that sell products on the Internet. Taxing the "clicks and mortar" companies would generate an estimated $14 million annually. States can only require out-of-state businesses to collect their sales taxes when the business has a physical presence in that state, which could include a store or a warehouse.
Businesses that would be subject to California's proposed tax expansion would include Barnes and Noble, the bookseller that established a separate subsidiary to sell online.
If signed into law, California would be the first to require a sales tax on Internet goods and services. Similar federal legislation is stalled in the Senate Commerce Committee on Capitol Hill.
But some say the constitutionality of such a law is unclear when considering the due process clause. Out-of-state vendors are also protected by the Commerce Clause of the Constitution, which could prevent them from collecting sales taxes on behalf of states in which they do not have a physical presence.
"Unless the state revenue department can show the dot-com subsidiary is an agent of the parent company, then it can't force the parent to the dot-com subsidiary to collect taxes merely because the parent has a physical location in the state," said Mark Nebergall, head of the Software Finance and Tax Executives Council and a member of the Internet Tax Fairness Coalition. "Under the U.S. Constitution — the due process clause — you may not be able to do that, it's subject to constitutional challenge."
Nebergall noted that even if Davis agrees to the legislation — which seems unlikely since the governor has been vocal in his opposition to Internet taxes — other states may be slow to adopt similar legislation given concerns over constitutionality.
Some news reports have indicated the bill would put online companies on notice that California is serious about resolving the dilemma of how to even the playing field when it comes to taxing the physical and virtual presence of retailers in the state.
But the legislation does not have the support of its chief tax collector, Dean Andal, Chairman of the state's Board of Equalization. Andal was a vocal member of the congressional Advisory Commission on Electronic Commerce, opposed to expanding the current sales tax system to the Internet.
"A.B. 2412 is a significant and unconstitutional expansion of state taxing authority outside of California's territorial limit," Andel wrote in a letter circulated to lawmakers. "Enactment of A.B. 2412 will lead to lengthy litigation and, in the process, severely harm California's hard-earned reputation as one of the leading Internet-friendly states. Don't let them tax the Net."
In an effort to convince Davis to sign A.B. 2412, the legislature attached A.B. 1784, which extends the California Internet Tax Freedom Act — a bill Davis is said to favor.
Supporters of A.B. 2412 include the California Retailers Association, California State Association of Counties, League of California Cities and the Main Street Alliance. Those in opposition include the American Electronics Association, the Department of Finance and Silicon Valley Software Coalition.
California Expands Tech Development Funds
California Gov. Gray Davis, D, Friday announced $6 million in matching grants to 24 California-based technology companies to assist them in bringing innovative products to the marketplace. The California Technology Investment Partnership (CalTIP), a program of the Governor's Trade and Commerce Agency, will match the grants and will receive funding from federal agencies such as the National Science Foundation, Commerce Department and NASA. The grants will assist California high-tech companies like MicroAssembly Technologies, Quantum Magnetics and Hi-Z Technology to develop a wide-range of new products.
Davis also hailed the state legislative session a success Monday, saying that "here in Sacramento, we have done what seems so elusive in Washington: By putting partnership ahead of partisanship, we have done the public's business."
The state legislature established three centers for science and innovation at the University of California. It passed a bill to encourage long-term investment in California and raise the research and development tax credit increase from 12 percent to 15 percent and established the Computer Technology Initiative to buy computers for high schools to expand Internet access. Other legislation designates $18 million of the fiscal 2000-2001 budget to University of California students and faculty to increase access to Internet programs and $32 million to develop needed infrastructure to provide high-speed Internet access to elementary and secondary schools.
Davis also signed legislation making "bad faith" Internet domain name registrations illegal. The bill prohibits Internet users from registering ".com" and other domains that are "identical or confusingly similar" to the real names of other people, living or dead. State residents now have three separate and potentially contradictory avenues for reclaiming their names from cybersquatters — Internet Corporation for Assigned Names and Numbers (ICANN), federal statutes and the new state law.
Microsoft VS. California
A judge last week allowed the first class-action lawsuit to proceed against Microsoft on allegations that the company's monopoly harmed California consumers by forcing them to pay unreasonably high prices for products. Dozens of similar cases linger nationwide, many of which were filed after U.S. District Court Judge Thomas Penfield Jackson ruled that Microsoft violated federal antitrust laws and ordered the breakup of the company.
In a 21-page opinion released last week, San Francisco Superior Court Judge Stuart Pollack said an untold number of consumers should be represented in one trial to determine whether they paid unfair costs for Microsoft's MS-DOS and Windows operating systems, as well as Word and Excel programs, while denying that the suit "could result in repetitious litigation."
Pollak is scheduled to meet with attorneys Oct. 4 to prepare for trial, but no hearing date has been set yet. Microsoft urged Pollack on Aug. 4 not to allow the case to proceed because it would be nearly impossible to determine the damages with so many people involved. Microsoft attorney Charles Casper argued the judge should weigh consumer complaints on a case-by-case basis.
Gilmore's Digital Dominion
Virginia Gov. Jim Gilmore, R, last week launched www.thedigitaldominion.com, which he calls a model for governing in the Internet Age. "The Digital Dominion model will bring citizens and businesses closer to one another and closer to a more efficient and responsive government," he said. "Under this model, Virginia will stand as a new paradigm for governing in the Internet Age with unlimited opportunities to advance our role as a global technology leader." Gilmore stressed the speed and convenience of e-government services and its potential of the Digital Dominion to bridge the distance between people and their government.
Mineta On Tour
Commerce Secretary Norman Mineta will visit Philadelphia on the first stop of his national "Digital Inclusion" tour Thursday. Mineta and Philadelphia Mayor John Street will visit computer classes and meet with students while also stressing the importance of getting more senior citizens online. Mineta will encourage children to help their elders get online by having them send their grandparents their e-mail addresses on Grandparents Day Sunday. On Tuesday, Mineta released "Community Connections: Preserving Local Values in the Information Age," a report studying 11 rural American areas and how those communities use technology to connect residents and keep pace with the technological revolution. The report is sixth in a series of "lessons learned" reports from the National Telecommunications and Information Administration's Technology Opportunities Program (TOP).
Maryland Down On Unemployment
Maryland Gov. Parris Glendening, D, and Lt. Gov. Kathleen Kennedy Townsend attribute the state's record low monthly unemployment rates this year to its ability to integrate new economy components into the state's economy. "By increasing our investment in workforce training, providing an array of small and minority business assistance programs, and finding new and creative ways to attract new businesses, Maryland's labor force has grown at more than twice the national average," Townsend said in a statement. "This is further proof that our great state is making a successful transition to the new high-tech, high-speed economy." The two officials last week announced that July's 3.3 percent jobless rate marked a drop from 3.6 percent in June and is well below the national average of 4.2 percent.
Guinn Names IT Department Head
Nevada Gov. Kenny Guinn, R, Tuesday announced the appointment of Terry Savage as director of the state's department of information technology (DOIT). Savage replaces Marlene Lockard, who resigned in July. Savage is currently deputy director for technical operations at DOIT, a post he has held since January. He was formerly employed as a senior software integration project manager for a software development company in California. "Terry's technical expertise, experience and familiarity with the department make him a perfect choice to lead DOIT," Guinn said in a statement. "The agency is facing some daunting challenges at this time and I'm confident Terry will be an effective leader."
- by Liza Porteus
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