Use Tax Collection Requirements for Out-of-State Retailers

Assembly Bill 155 (AB 155), operative September 15, 2012, expands the types of out-of-state retailers that are required to register with the California Department of Tax and Fee Administration (CDTFA) to collect and remit use tax on sales of tangible personal property to California. As a result of the expanded definition of who is engaged in business in California, more online retailers must register with CDTFA to collect tax.

When out-of-state retailers do not collect tax, California consumers are still required to report and pay the equivalent of sales tax, known as "use tax." Consumers can pay directly to the CDTFA using eReg or pay on their California income tax returns with the option of using CDTFA's Use Tax Lookup Table.

AB 155 expands the types of out-of-state retailers that are “engaged in business in this state” and required to register with the California Department of Tax and Fee Administration (CDTFA) to collect and remit use tax on their sales of tangible personal property to purchasers in California. Under AB 155, an out-of-state retailer is engaged in business in this state if the out-of-state retailer has a substantial nexus with California for purposes of the commerce clause of the United States Constitution or federal law permits California to impose a use tax collection duty on the retailer. In addition, under AB 155, an out-of-state retailer has a substantial nexus with California and is engaged in business in this state if the retailer:

  • Is a member of a commonly-controlled group and combined reporting group and has a member of the retailer’s combined reporting group and commonly-controlled group performing services for the retailer in California that help the retailer establish or maintain a California market for sales of tangible personal property, or
  • Has an affiliate operating in California that refers potential customers to the retailer, by an internet-based link, Internet website, or otherwise, under specified circumstances.

Specifically, AB 155 amended Revenue and Taxation Code section 6203 to provide that the term “retailer engaged in business in this state” means “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty” and that the term now includes:

  • “Any retailer that is a member of a commonly controlled group, as defined in Section 25105, and is a member of a combined reporting group, as defined in paragraph (3) of subdivision (b) of Section 25106.5 of Title 18 of the California Code of Regulations, that includes another member of the retailer’s commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performs services in the state in connection with tangible personal property to be sold by the retailer, including, but not limited to design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer”; and
  • “Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise, provided that both of the following conditions are met:”

“The total cumulative sales price from all of the retailer's sales, within the preceding 12 months, of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, is in excess of ten thousand dollars ($10,000).”
“The retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to purchasers in this state in excess of one million dollars ($1,000,000).”

Assembly Bill x1 28 (ABx1 28) was enacted on June 28, 2011, to expand the types of out-of-state retailers that are required to collect California use tax, but ABx1 28 was retroactively repealed by the enactment of AB 155 on September 23, 2011. In addition to repealing ABx1 28, AB 155 also re-enacted the provisions of ABx1 28 (with one change discussed in FAQ 3) and postponed the operative date of the new provisions to either September 15, 2012, or January 1, 2013, depending on the status of federal and state legislation.

Because federal legislation authorizing the states to require out-of-state retailers to collect use tax without regard to the retailers’ locations was not enacted on or before July 31, 2012, AB 155’s amendments to Section 6203 are operative as of September 15, 2012.

For additional information on ABx1 28, see our Special Notice dated October 2011.

ABx1 28 provided that a retailer is engaged in business in California and required to register with the CDTFA to collect and remit use tax if the retailer has a specified agreement or agreements with a California affiliate or affiliates and the retailer, within the preceding 12 months, has: (1) total cumulative sales of tangible personal property to customers in California that were referred to the retailer under the terms of its affiliate agreements in excess of $10,000; and (2) total cumulative sales of tangible personal property to customers in California in excess of $500,000.

AB 155 not only postponed the operative date of the expanded registration and collection requirements of ABx1 28, AB 155 also increased the second total cumulative sales threshold amount (discussed above) from $500,000 to $1,000,000. This is the only change made to the provisions of ABx1 28 that were reenacted by the passage of AB 155.

Prior to the operative date of AB 155, Section 6203 defined the term “retailer engaged in business in this state” to mean any retailer that:

  1. Maintains, occupies, or uses, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business in California;
  2. Has any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in California under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property; or
  3. Derives rentals from a lease of tangible personal property in California.

These provisions are still part of Section 6203’s definition of “retailer engaged in business in this state” after the operative date of AB 155. The expanded registration and collection requirements under AB 155 are in addition to those requirements that were in place prior to the operative date of AB 155.

Article I, section 8, clause 3 of the United States Constitution expressly authorizes the United States Congress to “regulate Commerce with foreign Nations, and among the several States” (Commerce Clause). In Quill Corporation v. North Dakota (1992) 504 U.S. 298, the United States (U.S.) Supreme Court explained that, subject to Congress’s legislative authority, the Commerce Clause prohibits a state from requiring a retailer engaged in interstate commerce to collect the state’s use tax unless the retailer has a “substantial nexus” with the state. (See id. at p. 311). In Quill, the U.S. Supreme Court also affirmed the bright line rules, established in National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois (1967) 386 U.S. 753, that:
A retailer must have a “physical presence” in a taxing state in order for that state to impose a use tax collection obligation on the retailer (see id. at pp. 317-318); and

  • A state may not require a retailer to collect that state’s use tax if the retailer’s only connection with customers in the state is by common carrier or the United States mail (see id. at p. 315).

Under Section 6203, as amended by AB 155, an out-of-state retailer is engaged in business in California and required to register with the CDTFA to collect California use tax if the retailer has a substantial nexus with California for purposes of the Commerce Clause. Under Regulation 1684, subdivision (b)(2), there is a rebuttable presumption that a retailer has a substantial nexus with California and is engaged in business in this state if the retailer has any physical presence in California. A retailer may rebut the presumption if the retailer can substantiate that its physical presence is so slight that the United States Constitution prohibits this state from imposing a use tax collection duty on the retailer.

A retailer located outside of California does not have a physical presence in California, under Regulation 1684, solely because the retailer engages in interstate communications with California customers through common carrier, United States mail, telephone/cell phone, emails, or other forms of electronic telecommunication.

Retailers that do not have a physical presence in California are not presumed to be engaged in business in California.

No. Regulation 1684, subdivision (d)(1) expressly provides that the “use of a computer server on the Internet to create or maintain a World Wide Web page or site by a retailer will not be considered a factor in determining whether the retailer has a substantial nexus with California, unless the computer server is located in California and the retailer owns or leases the computer server. No Internet Service Provider, On-line Service Provider, internetwork communication service provider, or other Internet access service provider, or World Wide Web hosting services shall be deemed the agent or representative of any out-of-state retailer as a result of the service provider maintaining or taking orders via a web page or site on a computer server that is physically located in this state.”

Online advertising generated as a result of generic algorithmic functions that are anonymous and passive in nature, such as ads tied to Internet search engines, banner ads, click-through ads, Cost Per Action ads, links to retailers’ websites, and similar online advertising services, are advertisements and not solicitations. An out-of-state retailer would not be engaged in business in this state based solely on the use of these advertisements.

No. The expanded registration and collection requirements under AB 155 are in addition to those requirements that were in place prior to the operative date of AB 155. Therefore, if you were a “retailer engaged in business in this state” prior to the operative date of AB 155, your status has not changed due to the implementation of AB 155.

The terms “commonly controlled group” and “combined reporting group” are used in California’s Corporation Tax Law (Rev. & Tax Code, § 23001 et seq.). In general, a commonly controlled group is two or more corporations that are connected through defined levels of stock ownership. Revenue and Taxation Code section 25105, subdivision (b) provides that a “commonly controlled group” means any of the following:

  1. A parent corporation and any one or more corporations or chains of corporations, connected through stock ownership (or constructive ownership) with the parent, but only if—
    • The parent owns stock possessing more than 50 percent of the voting power of at least one corporation, and, if applicable,
    • Stock cumulatively representing more than 50 percent of the voting power of each of the corporations, except the parent, is owned by the parent, one or more corporations described in subparagraph (A), or one or more other corporations that satisfy the conditions of this subparagraph.
  2. Any two or more corporations, if stock representing more than 50 percent of the voting power of the corporations is owned, or constructively owned, by the same person.
  3. Any two or more corporations that constitute stapled entities.
    • For purposes of this paragraph, “stapled entities” means any group of two or more corporations if more than 50 percent of the ownership or beneficial ownership of the stock possessing voting power in each corporation consists of stapled interests.
    • Two or more interests are stapled interests if, by reason of form of ownership restrictions on transfer, or other terms or conditions, in connection with the transfer of one of the interests the other interest or interests are also transferred or required to be transferred.
  4. Any two or more corporations, all of whose stock representing more than 50 percent of the voting power of the corporations is cumulatively owned (without regard to the constructive ownership rules of paragraph (1) of subdivision (e)) by, or for the benefit of, members of the same family. Members of the same family are limited to an individual, his or her spouse, parents, brothers or sisters, grandparents, children and grandchildren, and their respective spouses.

Franchise Tax Board (FTB) Regulation 25106.5, subdivision (b)(3) defines “combined reporting group” to mean “those corporations with business income that is permitted or required to be included in a particular combined report under Sections 25101, 25101.15, 25102, or 25104 of the Revenue and Taxation Code, limited, if applicable, by application of Section 23801(c) of the Revenue and Taxation Code, or the effects of a water's edge election under Section 25110 of the Revenue and Taxation Code, or any other provision of law which precludes income and apportionment data of an entity from being included in a combined report. Members of a combined reporting group also refer to those S Corporations whose income is required to be included in a combined report under Section 23801(d) of the Revenue and Taxation Code.”

For purposes of the expanded registration and collection requirements for out-of-state retailers, an out-of-state retailer is engaged in business in California if a member of the out-of-state retailer’s commonly-controlled group and combined reporting group, pursuant to an agreement with, or in cooperation with the out-of-state retailer, performs services in California in connection with tangible personal property to be sold by the retailer, including, but not limited to design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer. Regulation 1684, Collection of Use Tax by Retailers, provides that for purposes of the above:

  • Services are performed in connection with tangible personal property to be sold by a retailer if services help the retailer establish or maintain a California market for sales of tangible personal property; and
  • Services are performed in cooperation with a retailer if the retailer and the member of the retailer’s commonly controlled group performing the services are working or acting together for a common purpose or benefit.

The mere presence of a member of an out-of-state retailer’s commonly-controlled group in this state does not give the out-of-state retailer commonly controlled group nexus or trigger the expanded registration and collection requirements. In addition, an out-of-state corporate retailer is not a “retailer engaged in business in this state” solely because it is acquired by another corporation that is engaged in business in this state.

An out-of-state retailer is engaged in business in this state and required to register with the CDTFA if a member of the out-of-state retailer’s commonly controlled group and combined reporting group performs services in this state, under an agreement with or in cooperation with the retailer, that help the retailer establish or maintain a California market for sales of tangible personal property

Regulation 1684, subdivision (c)(3) provides that:

“A retailer is engaged in business in this state…if the retailer enters into an agreement or agreements under which a person or persons in this state, for a consideration that is based upon completed sales of tangible personal property, whether referred to as a commission, fee for advertising services, or otherwise, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet website, or otherwise, provided that:

  1. The total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described above, in the preceding 12 months, is in excess of ten thousand dollars ($10,000); and
  2. The retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to purchasers in California in excess of one million dollars ($1,000,000).”

Regulation 1684, subdivision (c)(3), implements, interprets, and makes specific the provisions of Section 6203, subdivision (c)(5). Both Section 6203, subdivision (c)(5) and Regulation 1684, subdivision (c)(3) are commonly referred to as “affiliate nexus” provisions and retailers that are engaged in business in this state under Section 6203, subdivision (c)(5), as interpreted and implemented by Regulation 1684, subdivision (c)(3), are referred to as having “affiliate nexus.”

An out-of-state retailer is engaged in business in this state under the affiliate nexus provisions if:

  • The retailer has an agreement or agreements under which a person in this state (affiliate) directly or indirectly refers potential customers to the retailer, whether by Internet-based link, website, or otherwise.
  • The agreement or agreements provide that a commission (or other consideration) will be paid to the affiliates based upon completed sales of tangible personal property.
  • The retailer made more than $10,000 in sales of tangible personal property to purchasers in California which were referred to the retailer under affiliate agreements in the preceding twelve (12) months and the retailer made more than $1,000,000 in total sales of tangible personal property to purchasers in California in the preceding twelve (12) months.
  • The retailer’s affiliates directly or indirectly solicit potential customers in California through the use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means specifically targeted at potential customers in this state.
  • The retailer’s affiliates or persons acting on behalf of the affiliates solicit potential customers while physically present in California.

The affiliate nexus provisions do not apply to a retailer’s agreement with any person, unless an individual actually solicits potential customers under the agreement while the individual is physically present within the boundaries of California. In addition, there is no presumption that individuals are soliciting customers in California under “advertising” agreements with out-of-state retailers and Regulation 1684, subdivision (c)(7) provides that an out-of-state retailer can affirmatively establish that its “advertising agreement” with a California affiliate does not give the out-of-state retailer “affiliate nexus” if:

  • The retailer can show that the agreement prohibits persons operating under the agreement from engaging in any solicitation activities in California that refer potential customers to the retailer including, but not limited to, distributing flyers, coupons, newsletters and other printed promotional materials or electronic equivalents, verbal soliciting (e.g., in-person referrals), initiating telephone calls, and sending e-mails;
  • The person(s) operating under the agreement in California, annually certify, under penalty of perjury, that the person(s) have not engaged in prohibited solicitation activities in California at any time during the previous year; and
  • The retailer accepts the certification(s) in good faith.

If a person in California with whom the retailer has an agreement is an organization, such as a club or a non-profit group, the retailer must also show that its agreement provides that the organization will maintain on its website information alerting its members to the prohibition against each of the solicitation activities described above. If a person in California with whom the retailer has an agreement is an organization, the annual certification shall also include a statement from the organization certifying that its website includes information directed at its members alerting them to the prohibition against the solicitation activities described above.

A retailer will be regarded as accepting an annual certification in good faith if the retailer does not know or have reason to know that the certification is false or fraudulent. A retailer is excused from the requirement to obtain a certification if the person from whom the certificate is required is dead, lacks the capacity to make such a certification, or cannot reasonably be located by the retailer and there is no evidence to indicate that such person did in fact engage in any prohibited solicitation activities in California at any time during the previous year.

Regulation 1684, subdivision (c)(8) defines “solicit” to mean “to communicate directly or indirectly to a specific person or specific persons in California in a manner that is intended to and calculated to incite the person or persons to purchase tangible personal property from a specific retailer or retailers.”

Regulation 1684, subdivision (c)(8) also provides that for purposes of applying the affiliate nexus provisions, “solicit,” “solicitation,” “refer,” and “referral” do not mean or include “online advertising generated as a result of generic algorithmic functions that is anonymous and passive in nature, such as ads tied to Internet search engines, banner ads, click-through ads, Cost Per Action ads, links to retailers’ websites, and similar online advertising services.”

Regulation 1684, subdivision (c)(8)defines “advertisement” to mean “a written, verbal, pictorial, graphic, etc., announcement of goods or services for sale, employing purchased space or time in print or electronic media, which is given to communicate such information to the general public.Online advertising generated as a result of generic algorithmic functions that is anonymous and passive in nature, such as ads tied to Internet search engines, banner ads, click-through ads, Cost Per Action ads, links to retailers’ websites, and similar online advertising services, are advertisements and not solicitations.”

In addition, Regulation 1684,subdivision (c)(4) explains that the affiliate nexus provisions “do not apply to an agreement under which a retailer purchases advertisements from a person in California, to be delivered on television, radio, in print, on the Internet, or by any other medium, unless:

  • The advertisement revenue paid to the person in California consists of commissions or other consideration that is based upon completed sales of tangible personal property, and
  • The person entering into the agreement with the retailer also directly or indirectly solicits potential customers in California through the use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in this state.”(italics added.)

Regulation 1684 does not prescribe a form for use as an annual certification; however, our form, CDTFA-232, Annual Certification Regarding Solicitation Activities, may be used for the annual certification.

In general, a statement by a person, signed under penalty of perjury, that the person has not engaged in prohibited solicitation activities (i.e., including, but not limited to, distributing flyers, coupons, newsletters and other printed promotional materials or electronic equivalents, verbal soliciting (e.g., in-person referrals), initiating telephone calls, and sending e-mails) in California at any time during the previous year will satisfy Regulation 1684’s certification requirement, assuming the certification is accepted in good faith.

If the person making the certification is an organization, the person making the certification must also certify, under penalty of perjury, that the person’s website contains information alerting its members to the fact that the organization is prohibited from engaging in solicitation activities in California on behalf of the retailer.

The retailer must maintain the annual certification(s) and provide them to the CDTFA upon request to show that the retailer satisfied Regulation 1684’s certification requirements.

We recommend that you keep all relevant records for a minimum of eight years.The CDTFA may issue a billing for unpaid sales or use tax to persons who failed to file returns within eight years after due date of the unpaid tax (see RTC section 6487 and section 6487.05 for limitation periods).

The determination as to whether a retailer has made the requisite amount of sales to purchasers in California during the preceding twelve-month period to be considered engaged in business in this state under the affiliate nexus provisions shall be made at the end of each calendar quarter. A retailer is not considered “engaged in business in this state” under the affiliate nexus provisions if the total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to affiliate nexus agreements, in the preceding 12 months, was not in excess of $10,000, or if the retailer’s total cumulative sales of tangible personal property to purchasers in California were not in excess of $1,000,000 in the preceding 12 months.

If you wish to register with the CDTFA to collect and remit California use tax on sales of tangible personal property to California customers, you may register electronically by using the CDTFA’s Online Services.

For more information regarding the use tax registration and collection requirements, see Sales and Use Tax Regulation 1684, Collection of Use Tax by Retailers, or California Use Tax Information. For more information regarding the New Use Tax Collection Requirements for Out-of-State Retailers, see our Special Notice dated August 2012. You may also call our Out-of-State District office at (916) 227-6600, or our Taxpayer Information Section at 800-400-7115 (TTY:711), Monday through Friday 8:00 a.m. to 5:00 p.m., Pacific time, excluding state holidays.

This means consumers will see tax collected with their internet purchases as they as complete the sale online, in the same way tax is collected when they visit a local store.

Consumers will see more tax collected with their Internet purchases as they complete the sales online, in the same way tax is collected when they visit a local store. This will reduce the number of sales consumers need to keep track of and report themselves.

If purchases are made from an out-of-state retailer that is not registered to collect the tax, the purchaser is still required to report and pay the use tax.

The purchaser may report and pay use tax:

  • Directly to the California Department of Tax and Fee Administration by using the CDTFA's Online Services; or
  • Report and pay to the Franchise Tax Board (FTB) when filing an annual State Income Tax Return. Follow the instructions provided in the FTB return instructions for the calendar year 2012 for forms 540 and 540A, and 540EZ. As part of reporting use tax on the State Income Tax Return, the purchaser may also choose to use the Use Tax Lookup Table.