California Imposes New Registration and Use Tax Requirements on Out-of-State Retailers

by Greenberg Glusker Fields Claman & Machtinger LLP

California imposes use tax on tangible property that is purchased for sale outside of California for use in California.  Out-of-state retailers are required to register with the California Board of Equalization (BOE) and collect use tax from California customers if they are engaged in business in California.  Effective September 15, 2012, a broader group of out-of-state retailers, including certain internet retailers, are required to register with the BOE and collect use tax from California customers.

New Legislation
The change comes as a result of a new law expanding the definition of “engaged in business in California.”  Under prior law, out-of-state retailers were only considered to be engaged in business in California if they had a physical location in California, had persons operating in California that maintained a market for the retailer’s products, or derived rentals from a lease of tangible personal property situated in California.  The new law retains this definition, but broadens the meaning of “engaged in business in California” to also include retailers with certain other points of nexus with California, as described below.

Retailers with California Referral Sources
Under the new law, an out-of state retailer is engaged in business in California if:

  1. the retailer has an affiliate in California that refers potential California customers to it by an internet-based link, website, or otherwise, in exchange for consideration based on completed sales and
  2. the following thresholds are met over the prior 12 months: (a) the total cumulative sales from such referrals exceed $10,000 and (b) total sales to California purchasers exceed $1,000,000.

Out-of-state retailers that merely purchase advertisements from a person in California will not be covered by this provision unless the advertiser is paid based on completed sales and solicits California customers.

Retailers with California Affiliates
Under the new law, an out-of-state retailer is engaged in business in California if it uses the services of an affiliate in California in connection with tangible personal property to be sold by the retailer, provided that such affiliate is a member of the retailer’s commonly controlled group (i.e., the two parties are connected through 50% stock ownership) and combined reporting group (i.e., the two parties file a combined tax return).  This provision applies regardless of the amount of the retailer’s sales in California.

Retailers with California Servers

Under the regulations accompanying the new law, an out-of-state retailer that owns or leases a computer server located in California is considered to be engaged in business in California.  However, a retailer’s mere use of a computer server located in California to maintain a website is not a factor in determining whether the retailer is engaged in business in California so long as the retailer does not own or lease the server.  

If you have any questions regarding use tax collection or how this legislation may impact your business, please contact Lora Cicconi at  310.201.7499 or Gary Kaplan at | 310.201.7416.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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