Did a related corporation's interoffice distribution of employee-purchase catalogs make the out-of-state seller collect California use tax?

Plain-English summary

An Arkansas employee-purchase-plan corporation sold products by mail to employees of its corporate family. It bought catalogs and shipped them in bulk to manufacturing facilities, including California locations, where a related corporation's interoffice mail system distributed the catalogs to employees. Employees mailed orders and payment to Arkansas, and all merchandise, returns, and adjustments moved through the out-of-state operation.

The hearing recommendation concluded that California catalog distribution made the related corporation the petitioner's sales agent in the state. The out-of-state seller was therefore engaged in business under section 6203 and had to collect use tax from California customers, despite having no California employees, office, warehouse, or delivery vehicles.

Section 6204 made uncollected tax a debt owed by the retailer. The recommendation denied adjustment to the tax determination and sent the separate failure-to-file penalty-relief request to the Board for approval.

Common questions

Did customers have to place orders through the California facility?

No. They mailed orders directly to Arkansas.

Why was the related corporation treated as an agent?

It distributed the seller's catalogs to California employees through its interoffice system.

Was penalty relief decided in the recommendation?

No. The request was to be submitted to the Board.

Citations and references

• California Revenue and Taxation Code sections 6203 and 6204
• June 1, 1977 through March 31, 1979 audit, June 20, 1979 determination, and $486,152 protested measure — audit workpapers and determination not reproduced in the official PDF
• November 6, 1979 Sacramento hearing — hearing transcript and exhibits not reproduced in the official PDF
• Catalog purchases and distribution, order forms, shipments, payments, complaints, returns, adjustments, wholesale purchases, overstocks, and California sales — operations and audit calculation described; underlying records not reproduced in the official PDF
• Prior Board decisions concerning airline catalog distribution — decisions unnamed and not reproduced in the official PDF
• Penalty-relief statement signed under penalty of perjury — statement and later Board approval outcome not supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/220-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/220-0047.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination State
and Local Sales and Use Taxes
L--- S--- EMPLOYEE PURCHASE
PLAN, INC.
Petitioner

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220.0047

DECISION AND RECOMMENDATION
OF HEARING OFFICER

Account No. SN -- XX XXXXXX-010

The above-entitled matter came on regularly for hearing on November 6, 1979, in Sacramento, California. H. L. Cohen, Hearing Officer. Appearing for Petitioner:

Ms. M--- P--Manager, Domestic Tax
Mr. H--- M--Tax Accountant

Appearing for the Board:

Mr. Eugene Bush, Supervising
Auditor
Out-of-State District

PROTEST
Petitioner protests liability asserted for collection of use tax on mail order sales to California customers. Liability was asserted on an audit covering the period from June 1, 1977 through March 31, 1979. A determination was issued on June 20, 1979. The amount upon which the protested liability is based is $486,152. CONTENTIONS Petitioner contends that: 1. Petitioner has no nexus with the state that would justify the imposition of the duty to collect use tax. 2. Even if petitioner is liable for collection of the tax, relief should be granted from the penalty for failure to file returns.

L--- S--- Employee Purchase
Plan, Inc.
SN -- XX XXXXXX-010

-2-

December 12, 1979
220.0047

SUMMARY
1.
Petitioner is a corporation wholly owned by L--- S--- & Co. It is in the business of selling L--- S--- products to L--- S--- employees. It was incorporated in 1977 in Arkansas but is not qualified to do business in California. It does not hold a seller’s permit and has filed no sales and use tax returns. Prior to 1977 this activity was carried out by a division of another subsidiary of L--- S--- A---, Inc. [A], which reported and paid tax on similar sales to L--- S--- employees. 2. Petitioner maintains its offices and warehouse in --- ---, Arkansas. There are no employees or offices in California. Merchandise catalogs are purchased and then distributed in bulk to all L--- S--- manufacturing facilities including those in California. The catalogs are distributed unaddressed to employees by the inter-office mail distribution system of the manufacturing facility. Employees wishing to order merchandise must use postage paid order forms which are included in the catalogs and which are addressed to petitioner in [Arkansas]. All orders are shipped from the [Arkansas] warehouse by United Parcel Service or the United States mail. Petitioner owns no delivery vehicles. Orders are shipped directly to the address provided by the purchaser. All complaints, returns, and adjustments are handled by petitioner in
[Arkansas]. Payment can be by check or bank charge card; there is no provision for payment by payroll deduction. 3. Petitioner purchases goods from L--- S--- just as any other retailer, paying the same wholesale price. L--- S--- ships goods to petitioner and never ships directly to petitioner’s customers. Overstocks cannot be returned to L--- S--- just as overstocks of other retailers cannot be returned. 4. The auditor regarded L--- S--- as petitioner’s sales agent in this state, and based its finding that petitioner had nexus with the state on this finding of nexus. The auditor calculated that 12.079% of the total sales of A--- during the period of July 1, 1976 through May 31, 1977, were sales to California consumers. That percentage was applied to petitioner’s sales for the period from June 1, 1977 through December 31, 1978. Petitioner’s actual sales to California consumers for the period January 1, 1979 through March 31, 1979, were also included in the measure of the tax asserted. Petitioner does not contest the measure. 5. Petitioner contends that the distribution of catalogs by L--- S--- is insufficient to make L--- S--- its agent. Petitioner also contends that if petitioner does have a presence in the state, this presence is so slight that there is not duty to collect tax. 6. Petitioner submitted a statement signed under penalty of perjury requesting relief from the penalty for failure to file returns.

L--- S--- Employee Purchase
Plan, Inc.
SN -- XX XXXXXX-010

-3-

December 12, 1979
220.0047

ANALYSIS AND CONCLUSIONS
1.
The sole issue here is whether petitioner has a sufficient connection with the state to justify the imposition of the duty to collect the use tax from its customers. Section 6203 of the Revenue and Taxation Code provides that every retailer engaged in business in this state and making sales of tangible personal property for storage, use or other consumption in this state shall collect the use tax from the purchaser. Clearly petitioner is a retailer making sales of tangible personal property for consumption in this state. The question is whether petitioner is engaged in business in this state within the meaning of the law. Section 6203 defines “retailer engaged in business in this state” to include any retailer maintaining an office or warehouse in this state either directly or through an agent, and any retailer having any representative, agent, salesman, or solicitor operating in this state for the purpose of selling, delivering, or taking of orders for tangible personal property. I conclude that the distribution of catalogs by L--- S--results in L--- S--- being an agent of petitioner. This is consistent with prior Board decisions that the distribution of catalogs by airlines to passengers makes the airlines agents of the sellers of the goods in the catalogs. Since petitioner has an agent in California, it is required to collect the use tax. Section 6204 provides that the tax which a retailer is required to collect is a debt owed by the retailer to the Board. Petitioner is therefore liable for the amount of the tax that should have been collected. 2.

Petitioner’s request for relief from penalty should be submitted to the Board for approval.

RECOMMENDATION
Redetermine without adjustment.

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H. L. COHEN, HEARING OFFICER

Dec 12, 1979
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Date