Engaged in Business in California? Use Tax Owed

CALIFORNIA:  Numerous use tax bulletins are being updated by the California State Board of Equalization.  This is so that taxpayers understand what triggers a use tax obligation.

A business is engaged in business in California and required to remit use tax if any of the following apply.

• Physical Business:  You, a subsidiary or agent directly or indirectly mains, occupies or uses a temporary or permanent office or any other physical place of business in California.
• Representative:  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.”
• Leased Property:  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.
• Affiliates:  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.”
• Trade Shows and Conventions:  If you or your employee are physically present in California only to participate in convention and trade show activities, use tax is not owed if these conditions are met:
  • Participation in tradeshow or convention activities for 15 days or less during any 12-month period.
  • Net income earned during these activities is no more than $100,000 during the prior calendar year.

If any merchandise is sold at the trade show or orders taken for later delivery to California buyers, CA sales tax is due.

• Shipping by Common Carrier:  There is no use tax obligation if the only connection to CA is to ship products to customers through US mail or another common carrier.
• Internet:  If a computer server on the internet is used or an internet service provider to create or maintain a website or webpage, no use tax obligation is triggered.  If you own or lease the computer server that is a location in CA, you do have a use tax obligation.
• Online Advertising:  In CA, no use tax is owed if your only connection with the state is the posting of click-through ads or other types of online ads that provide a link to your website on other person’s websites.  “Online advertising generated as a result of generic algorithmic functions that are anonymous and passive in nature, such as ads tied to the Internet search engines, banner ads tied to the 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,” explains the BOE.
• Warranty and Repair Services:  If your only connection to CA is the use of a representative or independent contractor in the state to perform warranty or repair services for the products you sell, then use tax is not owed.  If the ownership of the representative or independent contractor is substantially similar to your own, then you may owe use tax.