California sales tax legislation a challenge to online retailers

An estimated $100 million in potential sales tax revenue never makes it into state coffers – and won't any time soon – even in a monumental year of budget shortfalls.

A bill to close what some call a loophole for Internet purchasers stalled in the Legislature earlier this year in the face of steep opposition from online retailers and business groups. Gov. Arnold Schwarzenegger, citing opposition to new taxes, vetoed a budget that would have expanded the state's collections from online purchases.

Backers vow another try next year.

The issue is as contemporary as a computer, as old as the Constitution, and is changing almost day to day.

The ongoing question of what the state should receive centers on what constitutes a "physical presence" in the state for a retailer. This was easier to define before the Internet, when brick-and-mortar stores dominated. Online retailers who have such a tangible presence in California must collect sales tax.

But many online retailers simply have "affiliates" in California, not actual stores, and they don't currently pay sales tax.

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