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SACRAMENTO — Gov. Gray Davis has vetoed a bill strengthening requirements that California retailers collect taxes on Internet sales, saying it would send the wrong message to a fledgling industry. 

“In order for the Internet to reach its full potential as a marketing medium and job creator, it must be given time to mature,” the governor said Monday in his veto message. 

“Imposing sales taxes on Internet transactions at this point in its young life would send the wrong signal about California’s international role as the incubator of the dot-com community.” 

But the bill’s author, Assemblywoman Carole Migden, D-San Francisco, said the measure was about clarifying existing law and denying an advantage to large companies that have Internet sales operations. 

“Why should some big guys get to avoid (charging taxes) and get to give the little guys a competitive disadvantage?” she asked.  

“That’s all this (bill) says, that everybody plays by the same rules.” 

Current law requires businesses that have stores in California to collect sales taxes on the taxable items they sell in the state. 

Migden’s bill would have specified that processing sales orders by fax, telephone, the Internet or some other electronic procedure would not relieve California retailers of that responsibility. 

It also would have stipulated that companies could not avoid collecting the taxes by selling the same or a similar line of products on the Internet through a subsidiary. 

Migden said a few companies with retail operations in California have set up out-of-state Internet subsidiaries to avoid collecting the taxes. 

Davis also contended that Migden’s bill would violate a 1994 state appeals court ruling involving a Colorado-based mail-order company that was purchased by another firm that had facilities in California. 

The court held that the mail-order company, Current Inc., did not have to collect California sales taxes because it did not have close ties to its parent firm and offered a substantially different line of products. 

Migden’s bill would have applied to subsidiaries that were substantially owned by the California retailer and sold the same or a substantially similar line of products. 

The state Board of Equalization estimates that the bill would have generated another $14.4 million a year in state revenue, although the legislative analyst’s office said last February that untaxed Internet sales could be costing the state as much as $200 million a year. 

California’s sales tax, which ranges from 7 1/4 to 8 1/2 percent depending on the county, is the state’s second biggest revenue source. It generates about $32.1 billion a year. 

Davis didn’t rule out the need for Migden’s bill at some point in the future. He said the subject should be reviewed in the next three to five years. 

To that end, he signed a bill by Sen. John Vasconcellos, D-Santa Clara, that will set up a commission to study sales tax policies. 

Davis also signed a bill by Assemblyman Ted Lempert, D-Redwood City, that would have added extended a moratorium on local taxes on Internet access or online computer services until 2005. 

The moratorium is scheduled to expire in 2002. 

But Lempert’s bill will not take effect because the Legislature added language to it saying it could not become law unless Migden’s bill was signed by Davis. 

On the Net: Read Migden’s bill, AB2412, Vasconcellos’ bill, SB1933, and Lempert’s bill, AB1784, at www.sen.ca.gov or www.assembly.ca.gov.