California Governor Faces Taxing Decision

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August 31, 2000 (3:48 PM EDT)

The future of Internet taxation may be in Gray Davis' hands.

California's governor has until Sept. 30 to decide whether to sign a bill -- approved this week by both the state Senate and Assembly -- that would require retailers to charge sales tax on online purchases made by state residents.

Davis' decision is expected to be influenced by two huge considerations: the potential for setting precedent on the nationwide issue of Internet taxation; and the fact that the sales tax would not apply to online retailers that don't have a physical presence in the state.

John Muller, a partner in the commerce and finance group of law firm Brobeck, Phleger & Harrison, expects the bill to be a source of considerable controversy if it becomes law. Controversy aside, Muller said the state is attempting to define what it means to conduct business in California in the Internet age.

While many brick-and-mortar retailers throughout the state already charge sales tax on online purchases, some have created out-of-state online entities in order to qualify as exempt.

"There are a few companies that have been pushing the envelope," Muller said.

Roger Salazar, Davis' deputy press secretary, said the governor hasn't taken a public position on the bill, but he's likely to consider it carefully because of the interest of other states' lawmakers, as well as the controversy surrounding which companies are subject to the tax.

Salazar did say, however, that Davis sees the Internet as an economic engine for the state. For that reason, "he's generally opposed to Internet taxation for the near future," Salazar said.

Rob Labatt, director of research at Gartner Group, said that while many online retailers are afraid that opening the door to Internet taxation will negatively impact their businesses, research indicates that shoppers go online for convenience, not price.

A sales tax should not be a major inhibitor, Labatt said.

"It removes one advantage of online retail, but not all of the advantages," he said.