With the states having problems staying financially solvent in the wake of the Great Recession, the Internet is becoming an ever more attractive way to generate tax revenue. California is one of these states looking to tax online sales as a way to make up for income shortfalls.

Democrats in California’s Assembly have brought forth Assembly Bill 2078, which if passed could generate an additional $100 million a year in revenue. Earlier this month the Assembly (the lower house in the state) passed the bill on an party line vote 46-28, with five abstentions. It has now moved on to the California Senate, where it has been debated and amended in committee.

Bill opponents have successfully been able to water down much of the bill within committee, however Democratic budget aides argue the Senate should approve the stronger measure. They argue that brick-and-mortar business make customers pay sales tax, thus online retailers should be compelled to do the same.

It would work a little differently, since Internet purchases would not be directly taxed. Residents of the state are already required to report their online purchases so that they are subject to a “use tax,” but few actually do.

The state does not enforce the law well, meaning it loses out on this additional money into the states coffers — only about $10 million annually is reported on state tax forms. Under the original version of this law — not the amended version coming out of the Senate tax committee — Internet retailers would be required to report sales to California residents to the state’s tax bureau, making collection much easier.

It is not clear at this time whether the bill will pass in its more stringent form. Democrats do hold majorities in both houses: the Senate has 25 Democrats, 13 Republicans, and 2 vacancies.The Assembly has 49 Democrats, 29 Republicans, 1 Independent, and 1 vacancy.

Politicians may be wary of passing new taxes in a year where anti-incumbency seems to reign. Half the Senate and the entire assembly are up for reelection, and Governor Arnold Schwarzenegger has repeatedly pushed back on attempts for more stringent use tax collection.

Opponents may have no choice however — with California in an increasingly serious budget crisis, getting tough on taxes may be the only option short of raising taxes altogether, which no politician wants to do in an election year.

 
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