On June 28, 2011, Governor Brown signed ABx1 28, which will require certain out-of-state retailers to collect and remit California’s use tax. California imposes a use tax on purchases made outside of California for the purpose of using the item in California. The use tax is intended to back up the sales tax and stop people from purchasing items outside of California in order to avoid California’s high sales tax. The tax is imposed on the purchaser but the state has a lot of trouble collecting it because many people do not properly report their out-of-state purchases and pay the use tax that they owe on those purchases. The revenue loss for states has become very significant with the explosion of massive internet retailers such as Amazon. A lot of goods that consumers used to purchase in California subject to sales tax are now being ordered from companies like Amazon with no sales or use tax being paid.
States know that the most effective way to collect their use tax is to require the out-of-state retailer to collect it for them. The problem for the states is that in order to pass muster under the commerce clause of the United States Constitution, an out-of-state retailer must have certain minimum contacts with California before California can impose a requirement to collect its sales or use tax. Lawyers refer to this as “nexus.” States have been stretching to enact laws requiring sales or use tax collection by companies having only very minimal tangible or physical connections to the state. New York took the lead on this issue and some other states have followed suit. California has now joined the fray.
Out-of-state retailers who have offices or stores in California were previously required to collect use tax on their sales made outside of California where the goods were delivered within California. Revenue and Taxation Code Section 6203 now also requires an out-of-retailer to collect the California use tax if a related company or affiliate performs any services within California in connection with the retailer’s sales made outside of California and delivered to California purchasers. In addition, a retailer will now be required to collect the use tax if it has an agreement to pay a fee to someone in California for the referral of sales to it, whether by an internet based link, website, or otherwise. This requirement only applies if the retailer had cumulative sales resulting from these agreements in the prior twelve months in excess of Ten Thousand Dollars ($10,000) and had total sales to California purchasers in excess of Five Hundred Thousand Dollars ($500,000) during the prior twelve months. It is this provision that was designed to require Amazon and other large internet retailers to collect California use tax.
There have been a number of articles and news reports about Amazon terminating its California based commission agents because of this new law. The law took effect upon the governor’s signature, but will be challenged in court. Amazon is also working on a ballot referendum to put the measure before the voters, and so far has refused to collect the California use tax from its customers. We will keep you apprised. In the interim, if you have any questions about the California legislation, please contact Chris Campbell in our tax group.