Did independent California dealers selling an out-of-state company's products make the company collect use tax on its direct mail-order sales?

Plain-English summary

An out-of-state company sold merchandise directly to California consumers through an out-of-state mail-order division. Orders were taken by telephone in Pennsylvania and shipped by UPS. California customers could also buy the same brands from independent California dealers supplied through wholesale distributors.

California concluded that the dealers appeared to be retailers selling on their own behalf, not agents or representatives of the mail-order company. They also sold competitors' products, had no ownership connection with the company, and handled their own nonwarranty repairs. The stated facts showed no California office, inventory, employee, contractor, agent, or other physical presence attributable to the company.

On those assumptions, the company was not engaged in business under section 6203 and did not have to collect use tax on its direct mail-order sales. California purchasers still owed the applicable use tax themselves.

Common questions

Did carrying the company's brand make a dealer its agent?

No, not on the described facts.

Did authorized dealers' repair work create presence for the seller?

No. The company was not involved in the dealers' out-of-warranty repairs, while covered warranty work was performed outside California except for manufacturer-responsible engines.

Did the ruling eliminate the purchaser's use tax?

No. It addressed the seller's collection duty; California consumers remained liable for use tax.

Citations and references

• California Revenue and Taxation Code sections 6051, 6201, 6202, 6203(a)–(b), 6204, and 6401
• Quill Corp. v. North Dakota, 504 U.S. 298
• National Geographic Society v. State Board of Equalization, 430 U.S. 551
• CPA's April 21, 1994 letter — request letter not reproduced in the official PDF
• Assumption that “company” meant the parent seller inclusive of its mail-order division — assumption stated
• Telephone orders, UPS shipments, California presence, employees and contractors, compensation, inventory, offices, warranties and repairs, wholesale distribution, dealer authorization, competing brands, ownership, contact, and termination — facts described; underlying records and agreements not reproduced in the official PDF
• Assumptions that no California dealer or other person acted for the seller and that the seller had no California physical presence for any purpose — conclusion expressly conditional on those assumptions

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/220-0117.pdf

Original ruling text

220.0117

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2641

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

June 10, 1994

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Mr. J--- F. K---, CPA
F--- & C---, P.C.
Certified Public Accountants
--- --- Square, Suite XXX
--- ---, PA XXXXX
Dear Mr. K---:
I am responding to your letter of April 21, 1994. You ask whether your client, an out-ofstate retailer named S---, P---, Inc. ("S---"), is responsible for collecting use tax on merchandise sold into California. California consumers can purchase S--- merchandise directly from its M--- mail-order division. Orders for such purchases are taken by telephone at the company's headquarters in Pennsylvania and the property is shipped directly to the consumer from Pennsylvania by UPS. You state that with respect to M---, the company has no continuous or regular physical presence in California. I assume that by "company" you mean S---, inclusive of M---. You state that it has no employees, independent contractors, or other agents soliciting orders in California who receive commissions or other compensation from S---, nor does the company have any inventory or offices in California, owned or rented by it or any of its representatives. If a product sold by S--- requires repair covered by warranty, the work is performed in Pennsylvania (except with respect to engines whose manufacturer is responsible for the warranty repairs). S--does not offer repair services for items it sells which are no longer covered by warranty. Such repairs are offered by authorized California dealers of its merchandise; S--- is not involved in such repairs. California customers can also purchase S--- merchandise from authorized California dealers. S--- has a distribution network of wholesale distributors to whom it sells its merchandise. Those wholesale distributors in turn sell the merchandise to authorized

Mr. J--- F. K---, CPA

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June 10, 1994
220.0117

independent dealers. The dealers carry M---' brands as well as those of competitors. S--- has no direct contact with or any ownership interest in the dealers. You state that S---'s connection with the dealers (you also call them "distributors") can be severed at any time. You believe that S---'s connection with its dealers is so "loose" that it is basically nonexistent. Discussion Sales tax is imposed on the retail sale of tangible personal property in California. (Rev. & Tax Code § 6051.) When sales tax does not apply, use tax is imposed on the storage, use or other consumption of tangible personal property purchased from a retailer for use in California. (Rev. & Tax. Code §§ 6201, 6401). Although the use tax is imposed on the purchaser, if the retailer is engaged in business in this state, it is required to collect the applicable use tax from the consumer and pay it to the Board. (Rev. & Tax. Code §§ 6202, 6203, 6204.) As relevant here, "retailer engaged in business in California" is defined by subdivisions (a) and (b) of Revenue and Taxation Code section 6203 as follows: "(a)

Any retailer maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business.

"(b)

Any retailer having any representative, agent, salesman, canvasser, or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, or the taking of orders for any tangible personal property."

You believe that the decision by the United States Supreme Court in the case of Quill Corporation v. North Dakota (1992) 504 US, 119 L.Ed 2d 91 applies here and that S--- is not required to collect California use tax because it does not have a physical presence in this state. The Court in Quill did conclude that a state could not impose a use tax collection duty on a retailer who had no physical presence in that state. However, please note that the physical presence required to impose a use tax collection duty does not have to relate only to the selling activity. In National Geographic Society v. State Board of Equalization (1977) 430 US 551, the Court held that an office in a state for a purpose other than selling tangible personal property was sufficient physical presence upon which to base a duty to collect the state's use tax. Thus, S--would be a retailer engaged in business in this state required to collect the use tax if it has a business location in this state for any purpose, even if that purpose were unrelated to the sale of tangible personal property. (Rev. & Tax. Code § 6203(a).) Furthermore, S--- would also be regarded as a retailer engaged in business in this state required to collect the use tax if it has any agents or representatives acting on its behalf in this state for the purpose of selling, delivering,

Mr. J--- F. K---, CPA

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June 10, 1994
220.0117

installing, assembling, or the taking of orders for any tangible personal property. (Rev. & Tax. Code § 6203(b).) From the description you provide, it appears that the dealers are retailers who sell S---'s merchandise on their own behalf and not for S---. The facts as stated in your letter do not indicate that the dealers, or anyone else in California, acts as S---'s agent or representative for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property. Assuming that S--- has no agents or representatives in California acting on its behalf, and has no physical presence in this state, even a presence unrelated to the sale of tangible personal property, then we would agree that it is not a retailer engaged in business in California and thus is not liable to collect use tax on its mail order sales of merchandise to California consumers. Of course, the California consumers who purchase such property from S-- are liable for the applicable use tax. If you have any questions, please do not hesitate to write again. Sincerely yours,

Victor G. Matl
Tax Counsel
VGM:plh

cc:

Out-of-state Sacramento District Administrator - OH