alifornia is the most populated state in the U.S. and has the largest budget deficit in the country; it also could be losing more tax revenue generated from online sales than any other state. Add these factors together and it's no wonder California is taking steps toward legislation that would impose a state sales tax on goods purchased on the Internet from out-of-state vendors.

The U.S. Supreme Court ruled in 1992 that it is unconstitutional for states to force businesses to collect sales tax unless a company has a physical presence (warehouse, office or retail store) in that state; however, Congress has the power to change this policy.

The California Legislature recently approved two bills focused on collecting online sales tax for purchases from companies that don't have a location in California, so it's up to Governor Gray Davis to make the call.

One bill would require California to join forces with 35 other states and the District of Columbia, a group that is working to create a standard to collect state sales tax on online and mail order purchases. The group is called the Streamlined Sales Tax Project, and it hopes to convince Congress to change the current law. California is involved with the group but only as an "observer state."

The other bill would require a retailer with a location in California to collect state sales tax on Internet transactions with California customers through the retailer's online subsidiaries and partners. Under the California Use Tax, consumers already are technically required to report and pay sales tax on any purchases that will be "used, consumed, given away or stored," but most people don't bother.

Davis historically has opposed a state sales tax on goods purchased over the Internet, especially when the California economy was booming from the dot-com industry. In 2000, the governor rejected a bill passed by the California Legislature that would require online merchants to collect sales tax.

But with a state budget deficit approaching $35 billion and California missing out on an estimated $1.7 billion in tax revenue each year, these taxes might be looking better and better.