Use Tax is Owed When You Are Engaged in Business in California
- Mar 18, 2014 | Gail Cole
The California State Board of Equalization has been updating numerous use tax bulletins, so that taxpayers will fully understand what triggers a use tax obligation. Bulletin 77, updated in February 2014, clarifies what it means to be “engaged in business” in California.
A business is engaged in business in California and required to remit use tax if any of the situations listed below apply.
You or a subsidiary or agent directly or indirectly maintains, occupies, or uses a temporary or permanent office or any other physical place of business in California (such as a place of distribution, or sample room).
A representative, agent, or independent contractor operates in the state “on your behalf or under your authority, or under the authority of your subsidiary, for the purpose of making sales, taking orders, installing merchandise, training customers, or making deliveries.”
You own or lease real property or personal property located in California, such as machinery, equipment and furniture including, but not limited to a computer server in California.”
People in California solicit and refer potential customers to you “by an Internet-based link, Internet website, or otherwise, “ and “receive compensation based on completed sales, under specified circumstances, provided:
- You have $10,000 in sales to California customers through referrals from California-based affiliates, and
- You sold more than $1 million in products to California consumers in the preceding 12 months.”
Commonly controlled group and combined reporting group
“You are a member of a commonly-controlled group and combined reporting group in which a member of the commonly-controlled group performs services for you in California that help you establish or maintain a California market for sales of products.” Examples include the “design and development of products you sell, or solicitation of sales or personal property on your behalf.”
There are some surprising use tax triggers. Send an employee to California to provide a training session for software, and you’ve triggered a use tax obligation. Store merchandise in a California warehouse and make sales in California, and you’ve triggered a use tax obligation (even if the bulk of your sales are to another state). Use an independent contractor to install property you sell, and voila, use tax obligation triggered.
However, there are also some instances in which a use tax obligation is not triggered. Several examples are described below.
Trade shows and conventions
Somewhat surprisingly, California use tax is not owed if you or your employee is physically present in California only to participate in convention and trade show activities, provided that the following conditions are met:
- You participate in trade show or convention activities for 15 days or less during any 12-month period; and
- Net income earned from trade show or convention activities in California was not more than $100,000 during the prior calendar year;
However, California sales tax is due on any merchandise sold at the trade show or orders taken at the show for merchandise later delivered to California buyers.
Shipping by common carrier
If the only connection you have to the state of California is to ship products to customers through United States mail or another common carrier, no use tax obligation is triggered.
If your business uses a computer server on the internet or an internet service provider to create or maintain a website or webpage, no use tax obligation is triggered. However, if you own or lease the computer server that is located in California, you do have a use tax obligation.
Click-through nexus has generated sales and use tax confusion in many states. In California, no use tax is owed if “your only connection with California is the posting of ‘click-through’ ads or other types of online ads that provide a link to your website on other persons’ websites.” As explained by the BOE, “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 tied to Internet search engines, banner ads, click-through ads, Cost Per Action ads, links to retailers’ websites, and similar online advertising services, are considered advertisements and not solicitations.”
Warranty and Repair Services
Use tax is not owed if your only connection to the state of California is “the use of a representative or independent contractor” in the state “to perform warranty or repair services for the products you sell.…” However, the ownership of the representative or independent contractor may not be “substantially similar” to your own. If it is, you could owe use tax.
Do you have a business tie to California, or any other state? An automated sales and consumer use tax solution is the way to go.