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California Tax Board Provides Guidance on the Broadened Definition of “Retailer Engaged in Business in This State”

On May 30, 2012, the State Board of Equalization (SBE), approved pro-posed amendments to the California Code of Regulations, Title 18, section 1684. The Proposed Regulation attempts to provide guidance as to the meaning of the broadened statutory definition of “retailers engaged in business in this state.” The statutory definition now includes retailers who are members of “commonly controlled groups,” as well as retailers who enter into agreements with “a person or persons in this state” who meet certain minimum thresholds.

Background and History
The Proposed Regulation attempts to provide guidance to retailers who may be subject to the use tax collection requirements under California Revenue and Taxation Code (CRTC) section 6203, as amended by Assembly Bill 155 (AB 155).1 California law requires every “retailer engaged in business” in California that sells tangible personal property for storage, use, or other consumption in the state to collect use tax from the purchaser.2

CRTC section 6203 defines “retailers engaged in business in this state” as “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.”3 The definition now encompasses retailers who are members of “commonly controlled groups,” as well as retailers who enter into agreements with “a person or persons in this state” who meet certain minimum thresholds.4

Much of the debate regarding the new legislation revolves around the State’s ability to impose use tax collection obligations on out-of-state retailers under the Commerce Clause. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the United States Supreme Court held that a state lacks jurisdiction to require out-of-state retailers to collect a sales or use tax when the retailer has no physical presence in that state. The Court held that physical presence was required for a business to have “substantial nexus” with the taxing state.

Moreover, in Current, Inc. v. State Bd. of Equalization, 24 Cal. App. 4th 382 (1994), the California Court of Appeal held that a retailer does not have the requisite physical presence solely because of its parent company’s presence in the taxing state. In Current, prior to the retailer being acquired, its only connection with the State was through common carrier or U.S. mail. Thus, the Court held that mere corporate affiliation, where neither company is an agent for the other, is not sufficient to establish substantial nexus with the State.5


  1. AB 155 was approved by the Governor and filed with the Secretary of State on September 23, 2011. AB 155 took effect immediately. However, its operative date was deferred pending the enactment of federal legislation. AB 155 provides that if federal law is enacted on or before July 31, 2012, authorizing the states to require a seller to collect taxes on sales of goods to in-state purchasers without regard to the location of the seller, and the state does not, on or before September 14, 2012, elect to implement that law, AB 155 will become operative on January 1, 2013. If federal law is not enacted on or before July 31, 2012, AB 155 will become operative on September 15, 2012. The Proposed Regulation shall become operative on the same date as AB 155. While there are other bills pending in Congress, the U.S. House Judiciary Committee will likely hold a hearing next month to discuss H.R. 3179, which would authorize states to require remote sellers to collect taxes. However, it is not anticipated that any such bill will be enacted by Congress by the July 31, 2012 deadline in AB 155.
  2. CRTC section 6203(a).
  3. CRTC section 6203(c).
  4. CRTC section 6203(c)(4), (5).
  5. Current, 24 Cal. App. 4th at 391.
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