Editor’s note: This information is provided by Moss Adams.
California’s “Amazon” Law Brings Use Tax to Online Sales
On September 15 California’s “Amazon law” (Assembly Bill 155) went into effect, requiring some out-of-state retailers, specifically online retailers that have nexus in California, to register with the California State Board of Equalization (BOE) and begin collecting and remitting use tax on sales of tangible personal property to California consumers.
This new law has broad implications, and the BOE is likely to increase enforcement. Those that fail to collect and remit use tax when required may be liable for the tax plus penalties and interest.
While the specifics of the law may be confusing, the bottom line is that California’s taxation of out-of-state businesses is expanding, and clients need to reassess their sales and use tax collection responsibilities in the state.
Does this new law create a new tax in California?
No. The new law broadens the types of out-of-state retailers considered to be engaged in business in California (those who have nexus) and requires them to register with the BOE to collect and remit use tax on sales in California.
Who had Nexus with California prior to the new law?
Entities with a physical presence in the state. A physical presence includes having an office, sales room, or warehouse; having a sales representative or agent; or receiving rental payments from the lease of tangible personal property.
Who else now has Nexus with California?
-Retailers who have agreements with entities in the state to refer potential customers to the retailer (directly or indirectly and for a commission or other consideration) by Internet-based links, Web sites, or through other means when both of the following conditions are met:
-The retailer made more than $10,000 in sales of tangible personal property to purchasers in California who were referred to the retailer under this type of agreement in the preceding 12 months.
-The retailer made more than $1 million in total California sales of tangible personal property in the preceding 12 months.
-Retailers who purchase advertising in any medium from an entity in California—provided that the entity is also directly or indirectly soliciting specifically targeted potential California customers through flyers, telephone calls, e-mails, blogs, social networking sites, or other means.
-Retailers affiliated with an entity defined by Internal Revenue Code Section 1504. Generally an affiliated entity is one or more corporations connected through stock ownership with a common parent corporation.
-Retailers who are members of a commonly controlled group and combined reporting group have nexus when another member of the group performs services in California that help the retailer sell tangible personal property.
What are commonly controlled groups and combined reporting groups?
A commonly controlled group, defined by the California Revenue and Taxation Code Section 25105, is generally two or more corporations connected through defined levels of stock ownership. A combined reporting group, defined in California Code of Regulations Section 25106.5(b)(3), generally refers to certain corporations whose business income is permitted or required to be included in a particular combined report.
What if an entity is not soliciting potential customers?
A retailer can demonstrate that its agreements with entities in California do not create nexus if:
-The retailer can show that the agreements prohibit entities from engaging in any solicitation activities mentioned above that refer potential customers.
-Entities annually certify under penalty of perjury that they have not engaged in prohibited solicitation activities at any time during the previous year.
-The retailer accepts the entities’ certifications in good faith.
Is Nexus created solely because a retailer posts click-through or other ads on web sites that link to the retailer’s website?
No. Online advertising generated as a result of generic algorithmic functions that are anonymous and passive in nature are not considered solicitations.
Does having a website or using an internet service provider create Nexus with California?
Web sites are not a factor in determining nexus unless the computer server is located in California and the retailer owns or leases it. Additionally, no Internet service provider or other Internet-related provider that takes or maintains orders via a Web page on a computer server located in California will be considered an agent or representative of any out-of-state retailer.
If a member of an out-of-state retailers commonly controlled group is located in California, is the out-of-state retailer automatically required to register with the BOE?
No, the mere presence of a commonly controlled group member in California does not give the out-of-state retailer nexus or trigger the expanded registration and collection requirements. Nor does an out-of-state retailer have nexus solely because it’s acquired by another corporation that’s engaged in business in California. To establish nexus, there must be an agreement such as the one listed above between the retailer and another member.
We’re here to help
Before registering with the BOE, responding to its questionnaire, and discontinuing any affiliate relationships in California, businesses should first carefully review their activities and contractual relationships in the state. For more information about the potential impact of the law, contact:
Ken Huang, Senior Manager
(415) 677-8320
Anna Ferraro, Senior Manager
(916) 503-8134
