The California tax man cometh, and he's headed for the Internet.
State tax collectors are preparing to crack down on renegade Internet merchants who don't collect sales taxes, and nearly 100 new state auditors, lawyers and other specialists are being hired to help over the next three years.
The effort comes at a time when state and local governments are scrambling for money after cutting billions of dollars from budgets and trimming public services. The governor has asked voters in November to approve an increase in sales and income taxes. The new enforcement effort is expected to bring in an estimated $317 million in its first full year, and even more in subsequent years as online shopping grows.
Officials will be enforcing a controversial law passed last year that expands the kinds of online retailers that are required to collect California sales taxes on Internet purchases. Currently, those taxes range from 7.25 percent to 9.75 percent, depending on where residents live.
"This law is a giant step forward," said Jerome E. Horton, chairman of the state's tax collection agency, the Board of Equalization. "It will help California collect much needed revenue to support critical public services."
Enforcement also will help protect California's bricks-and-mortar stores - which already collect sales tax - from unfair competition, he said.
Some online shoppers who like making tax-free purchases on the Internet are less pleased by the crackdown.
"I would like to be able to buy something cheaper by not paying taxes," said Ann Crill, 63, of Long Beach, Calif. "But then again, I can see the state's point of view that this is lost revenue."
The law that prompted the new enforcement effort was part of a compromise last year between the nation's largest online retailer, Amazon.com Inc., and state lawmakers. Under the agreement, Amazon agreed to open two distribution centers in California and start collecting sales taxes on sales in the state starting Sept. 15.
Major retailers such as Apple Inc., Staples Inc. and Wal-Mart Stores Inc. have been required to collect taxes on their online sales for years because they have stores and other operations in the state. But many others have exploited a decades-old loophole that exempted Internet and catalog sellers with no on-the-ground operations in the state.
Now the state is sending letters to more than 200 businesses, informing them that they may be required to start collecting sales taxes from California customers. The tax agency declined to release the list, saying such tax matters are confidential.
Many large online retailers, including Overstock.com, L.L. Bean and Blue Nile, do not currently collect sales taxes on California purchases. Overstock's president said his company was exempt from the new law and would not collect taxes; a spokesman for Blue Nile declined to comment. L.L. Bean did not return calls seeking comment.
The new tax law covers any out-of-state Internet retailer "that has a substantial nexus with California consumers," the tax agency said in a statement. That includes those that sold more than $1 million worth of goods to California shoppers in the last year and had more than $10,000 in sales referred to them by California-based affiliated websites.
Tax officials said figuring out which Internet sellers must collect the California sales tax won't be easy.
"We don't know how many will be affected, and how many won't," said Sean Wallentine, chief of staff to tax-agency board member George Runner. "It's a process the Board of Equalization will go through with each of those companies over time."
Getting that information will take more manpower. On Thursday, the tax agency announced new efforts that include spending $10 million over the next three fiscal years to hire nearly 100 tax specialists, auditors, lawyers and call-center operators. An additional 35 people will be needed in the fourth year, the board said recently.
These new workers are hired to identify and contact what the board estimates are "upwards of 2,000" out-of-state businesses that should be collecting sales tax under the new law and take action against any suspected scofflaws.
But going after large Internet retailers is "only the tip of the iceberg," Horton said. The Board of Equalization will also step up its efforts to educate consumers about their legal responsibility to remit their use taxes directly to the state on online purchases that aren't automatically taxed at the point of sale - something few Californians voluntarily do.
"There isn't enough personnel to collect that use tax that's outstanding; we'll never be able to do it," Horton said. "Our primary objective is to educate the consumer and hope that they start complying."
Tax law enforcement can be daunting. California and smaller states lack the auditing heft to fully enforce Internet sales tax laws, said Max Behlke, a policy specialist with the National Conference of State Legislatures.
"Bottom line is there's so much commerce going on, it's hard to pinpoint who's paying and who isn't paying," he said. "It would be nearly impossible to collect all the money that's owed."
Explore further: Bose sues Beats over headphone patents