The California state senate passed on Thursday a bill aimed at recovering lost sales tax revenue from online retailers like Amazon and Overstock. The bill is expected to pass the assembly as well. However, Governor Schwarzenegger vetoed a similar bill last year after Overstock threatened to cancel contracts with affiliates in the state.

The bill is intended to help balance the state’s $20 billion budget deficit, and is projected to recover $120 million per year in revenue from online retailers who don’t currently collect sales tax from customers in California. Under current state law, customers of companies like Amazon are required to pay sales tax for purchased goods, however there is no way for the state to track purchases to collect the money, because the state cannot require Amazon to collect the taxes for them.

In 1992, the U.S. supreme court ruled in Quill v. North Dakota that states cannot require companies to collect sales tax from residents if the company does not have any “substantial nexus” in the state. The 1992 ruling affirmed a similar ruling from 1967; in Bellas Hess v. Illinois, the court said that states could not require out of state companies to collect sales tax for them if the company had no office, salespersons or employees in the state, reasoning that it would violate the U.S. constitution’s “Dormant Commerce Clause”, which prohibits states from enacting laws which regulate interstate commerce, a power reserved to the federal government.

Proponents of the current legal efforts to tax online sales, say the affiliate marketers that Amazon and Overstock rely on to drive potential customers to their online storefronts, constitute a “substantial nexus” or “salesforce”, and therefor states can require the company to collect sales tax.

Both Amazon and Overstock have stated that, should California pass a law requiring them to collect sales tax, they will sever all ties with affiliates in the state. Both retailers have followed through with that threat in states where such measures have been signed into law.