Internet Retailer Use Tax Compliance
Article I, Section 8, Clause 3 of the United States Constitution, which is known as the Commerce Clause, expressly authorizes the United States Congress to regulate Commerce between the states, with foreign nations, and with Indian tribes.
The "Dormant" Commerce Clause, also known as the "Negative" Commerce Clause, is a legal doctrine that courts have implied from the Commerce Clause. The idea behind the Dormant Commerce Clause is that this grant of power implies a restriction prohibiting a state from passing legislation that improperly burdens or discriminates against interstate commerce.
Under existing state law, Chapter 3 (commencing with Section 6201) of Part 1 of Division 2 of the Revenue and Taxation Code, a use tax is imposed on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer. The use tax is generally the liability of the purchaser and must be paid either directly to the seller from whom the tangible personal property was purchased or directly to the Board of Equalization (BOE) if the retailer is not required to collect and report the California tax.
Section 6203 of the Sales and Use Tax Law defines "retailer engaged in business in this state," for purposes of determining whether an out-of-state retailer has sufficient business presence (also known as "nexus") in California such that the out-of-state retailer has a use tax collection responsibility on its sales made to California customers. If a retailer has sufficient business presence within the terms of Section 6203, that retailer is required to register with the BOE pursuant to Section 6226 and collect the applicable use tax on all sales of tangible personal property to its California customers.
On September 23, 2011, Governor Edmund G. Brown, Jr. signed Assembly Bill 155 (AB 155) which retroactively repealed the provisions of ABx1 28. ABx1 28, which was enacted on June 28, 2011, expanded the types of out-of-state retailers that are required to register with the BOE to collect and report use tax on sales of tangible personal property to their California customers. AB 155 also re-enacted the provisions of ABx1 28 (with one change discussed below) but provides that the provisions will not become operative until either September 15, 2012, or January 1, 2013, depending on the status of federal and state legislation. In other words, the provisions in ABx1 28 have effectively been delayed until either September 15, 2012, or January 1, 2013.
Among other things, the provisions of ABx1 28 that were retroactively repealed and the provisions of AB 155 that will be operative on September 15, 2012, or January 1, 2013, provide that a "retailer engaged in business in this state" includes:
- Any retailer that is a member of a commonly-controlled group and is a member of a combined reporting group 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 this 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.
- Any retailer that has a specified agreement or agreements with a California affiliate or affiliates that is otherwise sufficient to create a use tax collection obligation and the retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to customers in California in excess of a specified dollar amount or threshold. The threshold amount provided by ABx1 28 was $500,000, and AB 155 provides that the threshold amount will be $1,000,000, instead of $500,000.
Prominent California retailers, including Wal-Mart and Barnes & Noble, have told the BOE and the California Legislature that they are placed at a significant competitive disadvantage by Internet retailers who sell the same products but do not charge their California customers the sales tax, as retailers with 'brick and mortar' stores in California are required to charge.
If a federal law governing the imposition of use tax collection obligations is not enacted on or before July 31, 2012, then the provisions of AB 155 that expand the types of out-of-state retailers that are required to register with the BOE to collect California use tax will be operative September 15, 2012. If such federal law is enacted by July 31, 2012, and California does not elect to implement that law by enacting conforming state legislation on or before September 14, 2012, then the provisions of AB 155 that expand the types of out-of-state retailers that are required to register with the BOE will be operative January 1, 2013. As of November 28, 2011, there are three bills before the United States Congress that address the issue of imposing a use tax obligation upon out-of-state retailers. These include the Main Street Fairness Act, introduced by Senator Durbin on July 29, 2011, the Marketplace Fairness Act introduced by ten senators, including Senator Durbin, on November 9, 2011, and the Marketplace Equity Act of 2011 introduced by U.S. Representatives Steve Womack of Arkansas and Jackie Speier of California on October 13, 2011. For more details, please refer to: Comparison of Congressional Acts to Allow States to Impose a Use Tax Collection Obligation on Out-of-State Retailers.
For a more detailed discussion of this topic, please use the following link to the Board's web site to review the Initial Discussion Paper explaining the proposed amendments to Regulation 1684.
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