Tax Law Updates | New Statutes, Regulations, and Rulings
September 12, 2012
New California Law Requiring Out-of-State Retailers to Collect Use Tax Takes Effect on September 15, 2012
An Act to Repeal and add Section 6203 of the Revenue and Taxation Code - Assembly Bill 155
Stats. 2011, ch. 313 (AB 155), 8/31/2012
Beginning September 15, 2012, a new law takes effect (Stats. 2011, ch. 313 (AB 155) that expands the types of out-of-state retailers required to register with the California State Board of Equalization (BOE) and requires them to begin collecting and remitting use tax on sales of tangible personal property to California consumers.
The law applies to out-of-state retailers that have substantial nexus with California consumers. This includes any out-of-state retailer that has sold more than $1 million to California consumers in the past year and has had more than $10,000 in sales referred by an affiliate operating in California.
The BOE is sending letters to more than 200 out-of-state retailers notifying them about the new law. Retailers will be able to easily register online with the BOE’s secure and innovative electronic registration system (eReg) and remit the tax collected by e-filing their returns.
According to the BOE, AB 155 does not create a new tax — the California Use Tax has been on the books since 1935. It expands the types of out-of-state retailers required to collect the use tax. When AB 155 takes effect September 15, some additional out-of-state retailers, including Internet retailers, will collect the use tax at the point of sale, and California consumers will begin to see the tax on their bills.
However, if out-of-state retailers do not collect the tax, California consumers must continue to report and pay their use taxes. Consumers can pay directly to the BOE using eReg or pay on their California income tax returns with the option of using the agency’s Use Tax Lookup Table.
The BOE does not have a precise estimate of the amount of revenue expected to be collected from the new measure because AB 155 is a new law.
By way of background, AB 155 expands the types of out-of-state retailers that are “engaged in business in this state” and required to register with the BOE 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.
ABx1 28 provided that a retailer is engaged in business in California and required to register with the BOE 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.
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