New Registration Requirements for Out-of-State Retailers (ABx1 28) Frequently Asked Questions

Assembly Bill 155 (AB 155) is currently in the legislative process, and, if approved, will change the provisions of Assembly Bill x1 28 (AB x1 28). The BOE will continue to follow the provisions of AB x1 28 until AB 155 becomes law. 1. What does Assembly Bill x1 28 (ABx1 28) tax bill do? 2. How does a business affected by ABx1 28 register? 3. Do I use the district tax rate of the Affiliate and not collect the district tax of other locations where I am not engaged in business? 4. Should every order be taxed or only orders shipped into California? 5. Do I need to register if I make on-line sales? 6. What are a commonly controlled group and a member of a combined reporting group? 7. I am an Internet seller of software. All software is downloaded to the buyer. If I meet the $500,000 and $10,000 minimum requirements do I need to register and collect tax? 8. How will the BOE know if I met the $500,000 and $10,000 minimum requirements? 9. As an out-of-state retailer, am I required to register if I enter into an agreement or agreements to pay people or businesses in California a fee to advertise my business and refer customers to me, and I make more than $10,000 in sales as a result of such referrals? 10. I have been making sales to California purchasers for the last six years but I was not "engaged in business" in California until the provisions of ABx1 28 became effective. For the purposes of entering the information required on Form BOE 400 CSC, "California Certificate of Registration Use Tax Application," box number 5, what is the date my sales or leases began in California? 11. Will overhead functions such as billing or other financial activities that take place in California establish "nexus" for the seller even if all other business activities occur outside the state? 12. Do I have to register if I am a member of a commonly controlled group and a combined reporting group that includes another member that is engaged in business in California? 1. What does Assembly Bill x1 28 (ABx1 28) tax bill do? ABx1 28, which became effective on June 28, 2011, generally expands use tax registration requirements to some out-ofstate retailers that were previously not required to register to collect use tax on sales to California customers, such as internet retailers. Among other things, this bill specifically provides 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 entering into an agreement under which a person in this state, for a commission or other consideration, refers potential purchasers of tangible personal property to the retailer, whether by an Internetbased link or an Internet website, or otherwise provided that both of the following conditions are met: The retailer's total sales of tangible personal property to California consumers that are referred pursuant to all of those agreements with a person(s) in California in the preceding 12 months must be in excess of $10,000. The retailer's total sales of tangible personal property to California consumers in the preceding 12 months must be in excess of $500,000.

2. How does a business affected by ABx1 28 register? Businesses or individuals who are required to register should apply for a Certificate of Registration Use Tax using BOE-400-CSC, Certificate of Registration Use Tax. There is no charge for obtaining a California Certificate of Registration Use Tax. Back to Top 3. Do I use the district tax rate of the Affiliate and not collect the district tax of other locations where I am not engaged in business? If the Affiliate ( a person located in California who, under an agreement with an out-of-state retailer, refers potential customers for a commission or other consideration) is located in a district that imposes transactions (sales) and use taxes, you are "engaged in business" in the district. You are required to collect and report district use tax at the rate in effect in the district on all sales of tangible personal property shipped to purchasers located in the district. The following example illustrates when retailers should collect and report district use tax: An out-of-state retailer's Affiliate is located in Alameda County. The out of state retailer makes a taxable sale of property which is delivered to and used by the purchaser in Alameda County. The out of state retailer is engaged in business in Alameda County because the out of state retailer's Affiliate is located in Alameda County. Since the out of state retailer is engaged in business in Alameda County, the out of state retailer is responsible for collecting and reporting Alameda County district use tax. If the out of state retailer is not engaged in business in the county, the purchaser is responsible for reporting and paying district use tax. When a retailer is not engaged in business within a district they are required to collect the state tax and are not obligated to collect the district tax. If the retailer collects the district tax; than the purchaser has no further responsibility for reporting it to the BOE. 4. Should every order be taxed or only orders shipped into California? Retailers are not required to collect and pay California sales or use tax on sales of merchandise shipped to customers located outside California. However, merchandise delivered outside of California to purchasers known by the retailer to be California residents are presumed to be purchased for use in California and subject to use tax (see RTC 6247). Back to Top 5. Do I need to register if I make on-line sales? Retailers are required to register to report and pay California sales or use tax on sales of tangible personal property, including, on line sales, to California buyers if they are "engaged in business" in California. 6. What are a commonly controlled group and a member of a combined reporting group? Commonly Controlled Group California Revenue and Taxation Code section 21505, subdivision (b), explains that a "commonly controlled group" means any of the following: 1. A parent corporation and any one or more corporations or chains of corporations, connected through stock ownership (or constructive ownership) with the parent, but only if: A. The parent owns stock possessing more than 50 percent of the voting power of at least one corporation, and, if applicable, B. Stock cumulatively representing more than 50 percent of the voting power of each of the corporations, except the parent, is owned by the parent, one or more corporations described in subparagraph (A), or one or more other corporations that satisfy the conditions of this subparagraph. 2. Any two or more corporations, if stock representing more than 50 percent of the voting power of the corporations is owned, or constructively owned, by the same person. 3. Any two or more corporations that constitute stapled entities.

A. For purposes of this paragraph, "stapled entities" means any group of two or more corporations if more than 50 percent of the ownership or beneficial ownership of the stock possessing voting power in each corporation consists of stapled interests. B. Two or more interests are stapled interests if, by reason of form of ownership restrictions on transfer, or other terms or conditions, in connection with the transfer of one of the interests the other interest or interests are also transferred or required to be transferred. 4. Any two or more corporations, all of whose stock representing more than 50 percent of the voting power of the corporations is cumulatively owned (without regard to the constructive ownership rules of paragraph (1) of subdivision (e)) by, or for the benefit of, members of the same family. Members of the same family are limited to an individual, his or her spouse, parents, brothers or sisters, grandparents, children and grandchildren, and their respective spouses. Combined Reporting Group Franchise Tax Board Regulation 25106.5, subdivision (b)(3) provides that: "Combined reporting group" refers to those corporations with business income that is permitted or required to be included in a particular combined report under Sections 25101, 25101.15, 25102, or 25104 of the Revenue and Taxation Code, limited, if applicable, by application of Section 23801(c) of the Revenue and Taxation Code, or the effects of a water's edge election under Section 25110 of the Revenue and Taxation Code, or any other provision of law which precludes income and apportionment data of an entity from being included in a combined report. A combined reporting group also refers to those S Corporations whose income is required to be included in a combined report under Section 23801(d) of the Revenue and Taxation Code." Back to Top 7. I am an Internet seller of software. All software is downloaded to the buyer. If I meet the $500,000 and $10,000 minimum requirements do I need to register and collect tax? You are not required to register to pay California sales and use tax as long as the software is electronically transferred to the buyer and the buyer does not receive a tangible copy of the software, such as, a CD or other storage media, and you are not otherwise "engaged in business" in California. 8. How will the BOE know if I met the $500,000 and $10,000 minimum requirements? The BOE has a number of data sources and uses data-matching procedures to determine whether a retailer meets the $500,000 and $10,000 minimum requirements. Back to Top 9. As an out-of-state retailer, am I required to register if I enter into an agreement or agreements to pay people or businesses in California a fee to advertise my business and refer customers to me, and I make more than $10,000 in sales as a result of such referrals? You are required to register if you pay commissions or other consideration that is based upon sales of tangible personal property for such referrals. 10. I have been making sales to California purchasers for the last six years but I was not "engaged in business" in California until the provisions of ABx1 28 became effective. For the purposes of entering the information required on Form BOE 400 CSC, "California Certificate of Registration Use Tax Application," box number 5, what is the date my sales or leases began in California? If your business activities are subject to the provisions of ABx1 28, the date your sales or leases began in California is June 28, 2011, the date ABx1 28 became effective. Back to Top 11. Will overhead functions such as billing or other financial activities that take place in California establish "nexus" for the seller even if all other business activities occur outside the state? Retailers who maintain an office or other place of business in California are "engaged in business" in California and

required to register to collect California sales and use taxes regardless of whether the activities performed at the California location are overhead functions such as billing or other financial activities. In Quill Corporation v. North Dakota (1992) 504 U.S. 298, the U.S. Supreme Court affirmed the brightline rule that California cannot require a retailer to register to collect California use tax if the retailer's only contacts with California are by mail or common carrier. If a retailer does not limit its contacts with California as provided in Quill, then the retailer is engaged in business in California and required to register with the Board to collect use tax, except as provided in section 6203, subdivision (c)(5). 12. Do I have to register if I am a member of a commonly controlled group and a combined reporting group that includes another member that is engaged in business in California? You only have to register if the member of your group that is engaged in business in California performs services in California in connection with your sales of tangible personal property, including, but not limited to, design and development of tangible personal property you sell, or the solicitation of sales of tangible personal property on your behalf, pursuant to an agreement with or in cooperation with you. Back to Top

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