SACRAMENTO — Wading into one of the most controversial policy debates of the new economy, the California Legislature voted Wednesday to force many Internet retailers to charge sales tax in California.
At a time when government leaders from Washington to Wyoming are eyeing substantial tax revenues from the rapidly expanding e-commerce business, the Assembly's 42-31 approval of a measure by Carole Migden, D-San Francisco, thrusts California to the forefront of the debate. The bill was approved by the Senate 21-14 on Tuesday.
While the effect of the law is to make Internet sales conform to laws governing catalog operations, it also takes the critical step of defining Internet sales for taxing purposes.
Gov. Gray Davis had said he is opposed to Internet taxes, but even if he vetoes Migden's bill, it will be viewed as a bellwether on the overall issue.
"We are on the cutting edge of this," said Lenny Goldberg, the lobbyist for the California Tax Reform Association. "It will have have national implications. A lot of other states should be looking at this."
Migden's bill goes to the heart of the highly charged debate about taxing the billions of dollars of online sales of books, clothes, stereos and other goods.
At issue is whether Internet companies must charge sales tax just because they have a brick-and-mortar store in the state.
Critics maintain that the bill is a hidden tax increase and will drive business out of the state.
"This bill doesn't solve the problem, it exacerbates it," said Assemblyman Bill Leonard, R-Rancho Cucamonga.
But Migden said the bill simply clarifies existing law. "It is a fair and square measure," she said.
Andy Ross, owner of Cody's Books, a bookstore in Berkeley that has some online sales, said that current California law gives companies like Barnesandnoble.com an unfair advantage over his business.
"We never expected to get this far," he said. "We thought it was going to be a good consciousness-raising device about this tax loophole. "Surprisingly, California is taking a path-breaking role. California is like a company town that has been dominated by technology for many years now."
Although the federal government and dozens of states are considering taxing the Internet, officials in Migden's office said no other state has tried specifically to enforce sales tax collection by dot-coms.
The discrepancy stems from a 1992 U.S. Supreme Court ruling that requires merchants to collect sales tax only in states where they have a physical presence or "nexus."
In the past, Borders and Barnes & Noble have said that their stores do not constitute nexuses for their Web subsidiaries because their Internet operations are separate.
Even if Davis signs Migden's bill, it does not apply directly to companies like Amazon.com, which exist only as Web sites. However, its long-term affects are unclear, as the bill opens the doors to all kinds of Internet taxation.
Some opponents have said it is the thin edge of a wedge aimed at wholesale taxation of the Internet. The Internet is largely a tax-free zone because of the 1992 decision.
"(The bill) doesn't really apply to Amazon, which is the giant gorilla on the Internet," said Ross. "But we couldn't create the perfect law."
Other foes say the bill is simply misguided.
"This bill tries to shoehorn e-commerce business into an old tax system that doesn't make any sense," said Chris Schultz, spokesman for the American Electronics Association, a high-tech trade group in Silicon Valley that opposes the bill. "A better approach would be to simplify the tax code."
But proponents say such a law will level the playing field, and possibly provide a boon to schools, transportation agencies and others that rely on taxes to support improvements and new construction.
According to a General Accounting Office report released last month, California will forfeit between $23 million and $533 million in Internet sales tax revenues this year.
"This is closing a loophole," said Hut Landon, executive director of the Corte Madera's Northern California Independent Booksellers' Association, a group of about 300 booksellers that has lobbied for the bill's passage. "This is score one for the little guys."
Chronicle staff writer Verne Kopytoff contributed to this story.