Publication 77, Out-of-State Sellers: Do You Need to Register with California?

February 2014

Questions and Answers

When is a retailer considered to be “engaged in business in this state” under the affiliate nexus provisions?

An out-of-state retailer is engaged in business in this state under the affiliate nexus provisions if:

  • The retailer has an agreement or agreements under which a person in this state (affiliate) directly or indirectly refers potential customers to the retailer, whether by Internet-based link, website, or otherwise.
  • The agreement or agreements provide that a commission (or other consideration) will be paid to the affiliates based upon completed sales of tangible personal property.
  • The retailer made more than $10,000 in sales of tangible personal property to purchasers in California which were referred to the retailer under affiliate agreements in the preceding twelve (12) months and the retailer made more than $1,000,000 in total sales of tangible personal property to purchasers in California in the preceding twelve (12) months.
  • The retailer’s affiliates directly or indirectly solicit potential customers in California through the use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means specifically targeted at potential customers in this state.
  • The retailer’s affiliates or persons acting on behalf of the affiliates solicit potential customers while physically present in California.

What if an agreement between an out-of-state retailer and a person in California does not include direct or indirect solicitation of potential customers for the out-of-state retailer?

The affiliate nexus provisions do not apply to a retailer’s agreement with any person, unless an individual actually solicits potential customers under the agreement while the individual is physically present within the boundaries of California. In addition, there is no presumption that individuals are soliciting customers in California under “advertising” agreements with out-of-state retailers. An out-of-state retailer can affirmatively establish that its “advertising agreement” with a California affiliate does not give the out-of-state retailer “affiliate nexus” if:

  • The retailer can show that the agreement prohibits persons operating under the agreement from engaging in any solicitation activities in California that refer potential customers to the retailer including, but not limited to, distributing flyers, coupons, newsletters and other printed promotional materials or electronic equivalents, verbal soliciting (e.g., in-person referrals), initiating telephone calls, and sending e-mails;
  • The person(s) operating under the agreement in California, annually certify, under penalty of perjury, that the person(s) have not engaged in prohibited solicitation activities in California at any time during the previous year; and
  • The retailer accepts the certification(s) in good faith.

If a person in California with whom the retailer has an agreement is an organization, such as a club or a non-profit group, the retailer must also show that its agreement provides that the organization will maintain on its website information alerting its members to the prohibition against each of the solicitation activities described above. If a person in California with whom the retailer has an agreement is an organization, the annual certification shall also include a statement from the organization certifying that its website includes information directed at its members alerting them to the prohibition against the solicitation activities described above.

A retailer will be regarded as accepting an annual certification in good faith if the retailer does not know or have reason to know that the certification is false or fraudulent. A retailer is excused from the requirement to obtain a certification if the person from whom the certificate is required is dead, lacks the capacity to make such a certification, or cannot reasonably be located by the retailer and there is no evidence to indicate that such person did in fact engage in any prohibited solicitation activities in California at any time during the previous year.

Annual certification

Form, BOE-232, Annual Certification Regarding Solicitation Activities, may be used for the annual certification.

In general, a statement by a person, signed under penalty of perjury, that the person has not engaged in prohibited solicitation activities (i.e., including, but not limited to, distributing flyers, coupons, newsletters and other printed promotional materials or electronic equivalents, verbal soliciting (e.g., in-person referrals), initiating telephone calls, and sending e-mails) in California at any time during the previous year will satisfy Regulation 1684’s certification requirement, assuming the certification is accepted in good faith.

If the person making the certification is an organization, the person making the certification must also certify, under penalty of perjury, that the person’s website contains information alerting its members to the fact that the organization is prohibited from engaging in solicitation activities in California on behalf of the retailer.

The retailer must maintain the annual certification(s) and provide them to the BOE upon request to show that the retailer satisfied the certification requirements.

How long should I retain documentation regarding annual certification of no solicitation?

We recommend that you keep all relevant records for a minimum of eight years. The BOE may issue a billing for unpaid sales or use tax to persons who failed to file returns within eight years after due date of the unpaid tax (see RTC section 6487 and section 6487.05 for limitation periods).

What does “solicit” mean for purposes of applying the affiliate nexus provisions?

“Solicit” means to communicate directly or indirectly to a specific person or specific persons in California in a manner that is intended to and calculated to incite the person or persons to purchase tangible personal property from a specific retailer or retailers.”

For purposes of applying the affiliate nexus provisions, “solicit,” “solicitation,” “refer,” and “referral” do not mean or include “online advertising generated as a result of generic algorithmic functions that is anonymous and passive in nature, such as ads tied to Internet search engines, banner ads, click-through ads, Cost Per Action ads, links to retailers’ websites, and similar online advertising services.”

What does “advertisement” mean for purposes of applying the affiliate nexus provisions?

“Advertisement” means “a written, verbal, pictorial, graphic, etc., announcement of goods or services for sale, employing purchased space or time in print or electronic media, which is given to communicate such information to the general public. Online advertising generated as a result of generic algorithmic functions that is anonymous and passive in nature, such as 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 advertisements and not solicitations.”

The affiliate nexus provisions “do not apply to an agreement under which a retailer purchases advertisements from a person in California, to be delivered on television, radio, in print, on the Internet, or by any other medium, unless:

  • The advertisement revenue paid to the person in California consists of commissions or other consideration that is based upon completed sales of tangible personal property, and
  • The person entering into the agreement with the retailer also directly or indirectly solicits potential customers in California through the use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in this state.”

When are a retailer's sales measured to determine if the retailer has made the minimum amount of sales to California to meet the affiliate nexus sales thresholds?

The determination as to whether a retailer has made the requisite amount of sales to purchasers in California during the preceding twelve-month period to be considered engaged in business in this state under the affiliate nexus provisions shall be made at the end of each calendar quarter. A retailer is not considered “engaged in business in this state” under the affiliate nexus provisions if the total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to affiliate nexus agreements, in the preceding 12 months, was not in excess of $10,000, or if the retailer’s total cumulative sales of tangible personal property to purchasers in California were not in excess of $1,000,000 in the preceding 12 months.

Examples

Example 1. Corporation X is physically located in California and maintains a website at www.corporationx.com. Corporation X enters into agreements with one or more hiking gear and accessories retailers under which Corporation X maintains click-through advertisements or links to each retailer’s website on Corporation X’s website at www.corporationx.com and Corporation X’s webpage at www.socialnetwork.com/corporationx in return for commissions based upon the retailers’ completed sales made to customers who click-through the ads or links on Corporation X’s website and webpage. Corporation X also posts reviews at www.corporationx.com of the products sold through the click-through ads and links on its website and webpage. However, Corporation X does not engage in any solicitation activities in California that refer potential customers to the retailer or retailers who have click-through ads or links on its website or webpage. Therefore, the hiking gear and accessories retailer who has ads or links on Corporation X’s website or webpage is not engaged in business in California based on the agreements it has with Corporation X and is not required to register and pay the tax.

Example 2. Same as Example 1. above, except that Corporation X also enters into an agreement under which Advertising Corporation places advertisements for www.corporationx.com on other businesses’ websites and webpages, and mails or emails advertisements for www.corporationx.com to anyone who signs up to receive such advertisements. However, Corporation X does not engage in any solicitation activities in California that refer potential customers to the retailer or retailers who have click-through ads or links on its website or webpage and Advertising Corporation’s mailers and emails are advertisements, not solicitations. Therefore, the hiking gear and accessories retailer who has ads or links on Corporation X’s website or webpage is not engaged in business in California based on the agreements it has with Corporation X and is not required to register and pay the tax.

Example 3. Same as Example 2. above, except that an individual representative of Corporation X or any other individual acting on behalf of Corporation X, including, but not limited to, an employee or independent contractor of Corporation X or Advertising Corporation, engages in solicitation activities while physically present in California, such as soliciting customers in person, soliciting customers on the telephone, handing out flyers that are solicitations, or sending emails that are solicitations that refer potential California customers to a retailer who has a click-through ad or link on Corporation X’s website or webpage under Corporation X’s agreement with that retailer. Therefore, the hiking gear and accessories retailer who has ads or links on Corporation X’s website or webpage is engaged in business in California based on

  1. The total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described in paragraph (3), in the preceding 12 months, is in excess of ten thousand dollars ($10,000); and
  2. The retailer’s total cumulative sales of tangible personal property to purchasers in California are in excess of one million dollars ($1,000,000) in the preceding 12 months.

“Commonly controlled group” and “combined reporting group”

What is a “commonly controlled group” and a “combined reporting group”?

The terms “commonly controlled group” and “combined reporting group” are used in California’s Corporation Tax Law (Rev. & Tax Code, § 23001 et seq.). In general, a commonly controlled group is two or more corporations that are connected through defined levels of stock ownership. Revenue and Taxation Code section 25105, subdivision (b) provides 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—
  2. The parent owns stock possessing more than 50 percent of the voting power of at least one corporation, and, if applicable,

    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.

  3. 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.
  4. Any two or more corporations that constitute stapled entities.
  5. 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.

    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.

  6. 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.

Franchise Tax Board (FTB) Regulation 25106.5, subdivision (b)(3) defines “combined reporting group” to mean “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. Members of a combined reporting group also refer 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.”

When is the “commonly controlled group” nexus provision in Section 6203 triggered? For example, when is an out-of-state retailer, who is a member of a commonly-controlled group, engaged in business in California under the “commonly controlled group” nexus provision and required to register with the BOE and collect California use tax?

For purposes of the expanded registration and collection requirements for out-of-state retailers, an out-of-state retailer is engaged in business in California if a member of the out-of-state retailer’s commonly-controlled group and combined reporting group, pursuant to an agreement with, or in cooperation with the out-of-state retailer, performs services in California 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. Regulation 1684, Collection of Use Tax by Retailers, provides that for purposes of the above:

  • Services are performed in connection with tangible personal property to be sold by a retailer if services help the retailer establish or maintain a California market for sales of tangible personal property; and
  • .
  • Services are performed in cooperation with a retailer if the retailer and the member of the retailer’s commonly controlled group performing the services are working or acting together for a common purpose or benefit.

If a member(s) of an out-of-state retailer’s commonly controlled group is located in California, is the out-of-state retailer automatically required to be registered with the BOE?

The mere presence of a member of an out-of-state retailer’s commonly-controlled group in this state does not give the out-of-state retailer’s commonly controlled group nexus or trigger the expanded registration and collection requirements. In addition, an out-of-state corporate retailer is not a “retailer engaged in business in this state” solely because it is acquired by another corporation that is engaged in business in this state.

An out-of-state retailer is engaged in business in this state and required to register with the BOE if a member of the out-of-state retailer’s commonly controlled group and combined reporting group performs services in this state, under an agreement with or in cooperation with the retailer, that help the retailer establish or maintain a California market for sales of tangible personal property.