by Claudia Bruemmer

California Governor Jerry Brown signed a law on September 23rd that requires large online retailers to collect sales tax from state residents starting September 15, 2012; notwithstanding preemption by any new federal law. The California law covers retailers making $500,000 or more a year in online sales to California residents.

State law AB 155 came about as a result of the recent agreement between California legislators and Amazon.com, and was  subsequently approved by the governor. The new law supersedes an earlier bill (ABX 1 28) enacted in June that would have required online retailers to begin collecting sales tax from state residents on September 15, 2011 if the retailers conducted business with in-state affiliate websites and/or blogs. California affiliates can now breathe a sigh of relief since AB 155 has put many of the 25,000 affiliates back in business. Additionally, the new law will provide a level playing field among brick-and-mortar and web-only retailers.

ABX 1 28, based on the premise that affiliate websites represent an in-state physical presence for online retailers, would have given the state a means to go around the current federal law that allows states to mandate sales tax collection only by businesses with a physical presence in the state, which included stores and distribution centers. Amazon and other retailers stopped doing business with affiliate websites after passage of the former law to avoid collecting sales tax in California.

While AB 155 doesn’t remove the requirement for online merchants to collect sales tax, it puts on hold the requirement to collect the tax for one year until September 15, 2012. The law also acknowledges the efforts to create a nationwide standard for online sales tax collection in the excerpt below.

Under the law, AB155, online companies will have until at least July 2012 to try to persuade Congress to create a national system for collecting the sales tax. If that doesn’t happen, California’s measure would take effect next September. But if Congress does act, the state would acquiesce to that law with collection beginning in January 2013.

Amazon worked closely with the California legislature to createt a compromise. For the one year reprieve, Amazon agreed to the following:

… to build distribution centers in the state, creating at least 10,000 new full-time jobs and hiring 25,000 seasonal workers by the end of 2015. Amazon also has agreed to lobby for a new federal law that would authorize states to mandate tax collection by online retailers whether or not they had an in-state physical presence. The authorization would apply to all states that have simplified sales tax collection as part of the Streamlined Sales Tax Project, or SST.

Additionally, Amazon agreed to halt its effort to put a referendum on the tax law on California’s 2012 ballot. Amazon also agreed to lobby for a new federal law that would authorize states to mandate tax collection by online retailers whether or not they have an in-state physical presence.

“We’re grateful to Governor Brown and the legislature’s bipartisan leadership for this win-win law,” said Amazon Vice President Paul Misener. “We’re excited that we now can create 10,000 jobs and cause $500 million in investment in California in addition to reinstating our California-based affiliates,” he added. “We’re committed to working with Congress, retailers and the states to pass federal legislation as soon as possible and as analysts have noted, we’ll continue to offer customers the best prices, regardless of whether sales tax is charged,” he concluded.

Federal legislation on taxing online sales has been introduced many times in Congress over the last ten years, but never got much traction. However, there is a bill in the current Congress introduced by Senator Dick Durbin that will likely gain momentum due to the new California law, since California is a bell-weather state that other states follow.