Did sending employees into California to install displays require an out-of-state seller to collect use tax?

Plain-English summary

An Arizona firm designed and fabricated art creations and displays, made its California sales outside the state, and sometimes sent employees into California to set up or install the property. One installation lasted a week.

California concluded that this installation activity made the firm a retailer engaged in business in the state under section 6203(b). The statute covered a representative operating in California under the retailer's authority for selling, delivering, installing, or assembling tangible personal property.

Because the firm's contacts were not limited to mail, telephone, and common-carrier delivery, the historical physical-presence rule discussed in the letter did not protect it. The firm had to register and collect California use tax on sales of property for use in the state.

Common questions

Did the employees need to take orders in California?

No. Installation itself was one of the activities identified in section 6203(b).

Was one week of installation enough?

Yes under the letter's analysis. It also referred more generally to occasional employee installation visits.

Did the business-to-business nature of the work avoid collection responsibility?

No such exception was applied. The analysis focused on the seller's physical installation activity.

Citations and references

• California Revenue and Taxation Code sections 6201, 6202, 6203(b), 6204, and 6401; former section 6203(g)
• California Sales and Use Tax Regulation 1686
• Quill Corp. v. North Dakota, 504 U.S. 298; National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753
• Scripto v. Carson, 362 U.S. 207; Standard Pressed Steel Co. v. Washington Revenue Department, 419 U.S. 560; National Geographic Society v. California Board of Equalization, 430 U.S. 551
• Current, Inc. v. State Board of Equalization, 24 Cal.App.4th 382
• York Mfg. Co. v. Colley, 247 U.S. 21; Proctor & Schwartz v. Superior Court, 99 Cal.App.2d 376
• Counsel's March 14 and March 25, 1996 letters and attachment listing reviewed cases — requests and attachment not reproduced in the official PDF
• Arizona facility, display design and fabrication, California sales, employee installation visits, and one-week large-display installation — facts described; underlying contracts, invoices, travel, work, and installation records not reproduced in the official PDF
• Assumption that California customer sales occurred outside the state or otherwise were not subject to California sales tax — assumption stated; transaction records not reproduced in the official PDF
• Directed contact with the Out-of-State District to facilitate registration — no application or registration outcome 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/220-0093-775.pdf

Original ruling text

220.0093.775

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

June 19, 1996

KATHLEEN CONNELL
Controller, Sacramento
────────

Mr. L--- M. B--B--- Law Office
XXXX North --- Road, Suite XXX
---, Arizona XXXXX-XXXX

E. L. Sorensen, Jr.
Executive Director

Re: S--- P---, Inc.
Dear Mr. B---:
This is in response to your letters dated March 14, and March 25, 1996 to the Board’s Out-of-State District Office. You contend that your client, S--- P---, Inc. (hereafter “SPI”), is not a retailer engaged in business in California and is therefore not required to register with this Board and collect use tax on the property it sells for use in California. We understand from your letters that SPI maintains a single business facility in Arizona where it designs and fabricates art creations and displays for use in conventions, promotions and other public displays. We assume that SPI’s sales of its goods to its California customers occur outside this state or are otherwise not subject to California sales tax. You state that SPI occasionally sends its employees to California to set-up or install its visual displays for its customers inside this state. You also state that on one occasion SPI’s employees were present in California for a one week period in order to install a large display for one of its larger customers. California imposes a use tax on the sales price of tangible personal property purchased from a retailer for use in California, unless the use is specifically exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401. 1 ) Use tax is imposed on the person actually storing, using, or otherwise consuming the property within this state. (Rev. & Tax. Code § 6202.) A retailer engaged in business in this state is required to collect the applicable use tax from the purchaser at the time of the sale of property to be used inside this state. (Rev. & Tax. Code § 6203.) The tax that a retailer engaged in business inside this state is required to collect from its purchasers constitutes a debt owed by the retailer to the state. (Rev. & Tax. Code § 6204.) The purchaser’s liability is not extinguished until the tax has been paid to the state or has been paid to a retailer engaged in business in this state who gives the purchaser a receipt in the form set forth in Regulation 1686 showing that the tax has been paid. (Rev. & Tax. Code § 6202.) 1

Use tax does not apply where the retailer’s sale of the tangible personal property is subject to California sales tax.

Mr. L--- M. B---

-2-

June 19, 1996
220.0093.775

Revenue and Taxation Code section 6203 defines when a retailer is engaged in business inside this state. As relevant to SPI, subdivision (b) defines a retailer engaged in business in this state to include: “Any retailer having any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property.” The clear wording of this statute is that a retailer is engaged in business in this state if it has any representative operating in this state under its authority for purposes relating to the selling, delivery, installation or assembly of tangible personal property. This provision is consistent with the constitutional guidelines set forth by the United States Supreme Court in cases involving a state’s taxing authority over out-of-state retailers. In Quill Corporation v. North Dakota (1992) 504 U.S. 298, a retailer outside North Dakota challenged that state’s amendment of its use tax collection statute which, as amended, reached the Quill Corporation. Quill maintained no locations or employees in North Dakota. Quill did, however, solicit business in that state through catalogs and flyers, advertisements in national periodicals, and by telephone. All property sold to persons in North Dakota was delivered to them by mail or common carrier. The Court in Quill concluded that the rule for imposing a use tax collection duty on an out-of-state retailer would continue to be the same bright line test enunciated in National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967) 386 U.S. 753. (Quill, supra, at p. 108.) That test requires some physical presence in the taxing state before a retailer may be required to collect a state’s use tax, even though the “rule appears artificial at its edges ....” (Id.) This means that in the absence of specific Congressional legislation to the contrary, a state may not require an out-of-state retailer to collect use tax from its customers inside that state if that retailer has no physical presence within that state. The finding of a physical presence is, however, easily met and may be achieved through the use of independent contractors (see Scripto v. Carson (1960) 362 U.S. 207), a single employee working inside a state for its out-of-state employer (see Standard Pressed Steel Co. v. Wash. Revenue Dept. (1974) 419 U.S. 560), or even an out-ofstate retailer’s business location inside the taxing state that is unrelated to the sale of tangible personal property (National Geographic Society v. California Board of Equalization (1977) 430 U.S. 551, 556). California’s Revenue and Taxation Code section 6203(b) is consistent with the rules from these cases since it requires actual physical presence inside the state before an out-ofstate retailer is required to collect use tax from its California customers. You state that SPI sends employees or representatives into California to set-up or install its visual displays for its customers. This physical presence in California makes SPI a retailer engaged in business inside this state pursuant to Revenue and Taxation Code section 6203(b). Since SPI’s contact with California is not limited solely to mail, telephone, and common carrier,

Mr. L--- M. B---

-3-

June 19, 1996
220.0093.775

it is not protected by the bright line test of Quill and California is not prohibited from imposing a use tax collection duty on your client. SPI is therefore required to register with this Board and collect California use tax on its sales of property to its customers for use inside this state. Finally, the cases you cite, York Mfg. Co. v. Colley (1918) 247 U.S. 21 and Proctor & Schwartz v. Superior Court (1950) 99 Cal.App.2d 376, do not address whether a state may constitutionally impose a duty on an out-of-state retailer to collect use tax for that state. 2 That is the issue facing SPI. In that regard, Revenue and Taxation Code section 6203(b) requires SPI to do so and is within the Constitutional parameters set forth by the U.S. Supreme Court. Please contact the Out-of-State District Office to facilitate SPI’s registration. If you have any questions in the meantime, please write again. Sincerely,

Warren L. Astleford
Tax Counsel
WLA:rz

cc:

2

Out-of-State District Administrator
Mr. Joe Escobar (Out-of-State District - OH)

We note, however, that the attachment to your March 25, 1996 letter lists Current, Inc. v. State Bd. of Equalization (1994) 24 Cal.App.4th 382 as a case you reviewed. That case struck down the provisions of former section 6203(g) which imposed a collection duty on a person, even if it had no physical presence in this state if a related corporation had physical presence inside this state. The court held that nexus does not exist solely based on this type of relationship in the absence of an actual agency relationship where the corporation with nexus in California acted as the out-of-state corporation’s agent in this state. That is, the court held that some physical presence of the retailer is required, whether that physical presence exists through the retailer’s employees, agents, or representatives inside this state. We note that SPI’s nexus with California is based on section 6203(b) which requires actual physical presence inside this state. As discussed above, the provisions of section 6203(b) are constitutionally consistent with Quill and National Bellas Hess.