Did calling California franchise dealers 'independent contractors' prevent them from creating collection duties for an out-of-state encyclopedia seller?

Plain-English summary

An out-of-state supplier appointed California franchise dealers to solicit combination installment sales of magazines and encyclopedias in assigned territories. The supplier approved orders and drop-shipped products; dealers collected installments, kept 40%, and remitted 60%.

California treated the dealers as representatives, agents, or solicitors operating under the supplier's authority. The agreement's “independent contractor” label did not change their actual local solicitation function.

The supplier was engaged in business under section 6203 and had to register and collect use tax on the encyclopedias and yearbooks sold to California customers.

Common questions

Did out-of-state order approval prevent California agency?

No.

Did the independent-contractor label control?

No.

What dealer activities mattered?

Territory solicitation and installment collection under the supplier's agreements.

Citations and references

• California Revenue and Taxation Code section 6203
• Scripto v. Carson, 362 U.S. 207
• Copies of franchise agreements submitted by Out-of-State Compliance — agreements reviewed but not reproduced in the official PDF
• Dealer appointments and territories, solicitations, installment combination sales, order acceptance and approval, drop shipments, installment collections, and 40%/60% payment division — contract terms described; agreements and transaction records not reproduced in the official PDF
• Passage of title to magazines and encyclopedias — agreements did not specify whether or when title passed
• Required registration and use-tax collection — no application, return, or registration outcome supplied in the official PDF
• Unidentified enclosure marked “Enc.” — enclosure not reproduced 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/220-0100.pdf

Original ruling text

State of California

Memorandum

To:

Out of State – Compliance – Sacramento (DLF)

From:

Tax Counsel (GAT) - Headquarters
Legal

Subject:

H--- R--- L---, Inc.
XXX XXth Street
--- ---, Iowa

Board of Equalization

220.0100

November 30, 1964

We have reviewed the copies of franchise agreements which you have submitted concerning the operations of HRLI. The agreements provide for the appointment of individuals to act as representatives of HRLI in this state for the purpose of soliciting orders in specified territories for the sale of magazines and encyclopedias furnished by HRLI. Under the agreements, all installment combination sales of magazines and encyclopedias must be accepted and approved by HRLI. After acceptance by HRLI the encyclopedias and magazines are drop shipped to the customer. The agreements do not specify whether title to the magazines or encyclopedias pass to the dealer prior to shipment, after shipment, or at all. Under the agreements, the dealer is authorized to retain 40 per cent of the amount of installment payments which he collects and he is required to remit the remaining 60 per cent to HRLI. The dealer is designated under the agreement to be an independent contractor. On the basis of the foregoing, it is our opinion that the franchise dealers are representatives, agents, or solicitors operating in this state under the authority of HRLI for the purpose of selling or taking orders for encyclopedias. It is, therefore, our opinion that HRLI is a “retailer engaged in business in this State” within the meaning of § 6203, and is required to register and collect the use tax, which applies with respect to the encyclopedias and yearbooks sold to customers in California. Our conclusion is not altered by the fact that the “franchise dealers” are designated in the agreement as “independent contractors.” To paraphrase the Supreme Court’s language in Scripto

Out of State - Compliance (DLF)
H--- R--- L---, Inc.

-2-

November 30, 1964
220.0100

v. Carson, 362 U.S. 207, the contractual tagging of the salesman as “independent”, neither results in the changing of his local function of solicitation nor bears upon HRLI’s effectiveness in securing a substantial flow of goods into this state.

GAT:mm
Enc.