Did trade shows and 25 to 30 annual California sales-representative trips create collection responsibility for an out-of-state software seller?

Plain-English summary

An out-of-state software company had no California office, property, inventory, employees, or fulfillment operation. It nevertheless attended fewer than three California trade shows each year to identify leads, then sent nonresident sales representatives into the state about 25 to 30 times annually to meet prospects and maintain customer relationships. Visits lasted no more than a week and sometimes included pre-sale or limited post-sale training.

California rejected the claim that these entries were too limited or sporadic. The trade shows and recurring representative visits supplied physical selling presence and made the retailer engaged in business under section 6203(b).

Common questions

Did orders have to be approved in California?

No. Corporate headquarters approved sales outside the state.

Did outside fulfillment prevent the collection duty?

No. A third-party vendor shipped all orders from outside California, but the in-state selling activity still controlled the result.

Were fewer than three trade shows alone the only contact?

No. Representatives also made 25 to 30 California trips each year.

Citations and references

• California Revenue and Taxation Code section 6203 and subdivision (b)
• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274
• Quill Corp. v. North Dakota, 1992 U.S. Lexis 3l23 — the official PDF prints a lowercase "l"; normalized 3123 resolved in a bulk citation check, so the source string remains unchanged
• Taxpayer counsel's June 18, 1992 letter — facts quoted; full request letter not reproduced in the official PDF
• Boxed and limited-site software, corporate and institutional customers, claimed customer use-tax reporting, domicile, California office and property status, trade-journal ads, lead responses and qualification, trade shows, sales representatives, 25–30 annual trips, prospect and customer meetings, training, headquarters approval, telephone support, third-party fulfillment, and shipment — facts and contentions described; underlying company, customer, return, property, advertising, lead, show, travel, meeting, training, approval, support, fulfillment, and shipping records not reproduced in the official PDF
• Conclusion that the seller was engaged in business and had to collect use tax — no registration, return, remittance, audit, appeal, or final 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/220-0242.pdf

Original ruling text

220.0242

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

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

August 25, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

--- & --XXX --- Street
--- ---, CA XXXXX
Gentlemen:
This is reply to your June 18, 1992 letter regarding the collection of California use tax by your client. You noted the following facts: "Our client manufacturers and sells computer software throughout the United States in the form of boxed software with a shrinkwrap license and limited-site licenses. They sell almost exclusively to corporate customers and institutions who are likely to have reported use tax to the state. The client is domiciled outside of California, and does not maintain an office, any property, inventory, or employees within California. The Company advertises in national trade journals which generate leads via telephone and mail responses. A telemarketing group, located outside California, qualifies these leads, and determines whether they represent probable purchasers. Our client also attends trade shows in California, where leads are identified. These trade shows occur fewer than three times per year. "The Company employs sales representatives, who are not residents of California, whom call upon these specifically identified leads to solicit sales. In the past year, the level of activity in California has increased. These representatives enter California approximately twenty five to thirty times per year on an unscheduled basis to meet with specific prospects and to maintain relationships with existing customers. Each visit does not exceed one week. Occasionally, as part of the selling process, the vendor provides a presale training course to introduce a new product, and provides very limited post-sale training. Any sales made are approved at the corporate headquarters. Technical support is provided by telephone from the Company's offices. All order fulfillment is done by a thirdparty vendor and shipped from outside California to California customers."

--- & ---

-2-

August 25, 1992
220.0242

You asked us to confirm your understanding that your client is not a "retailer engaged in business in this state" as defined in Revenue and Taxation Code 6203. You believe that your client's entries into California are limited and sporadic and do not establish "substantial nexus" as required by Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) and Quill Corp. v. North Dakota, 1992 U.S. Lexis 3l23. We disagree. We believe that a retailer which both attends trade shows in California and employs representatives who make 25 to 30 trips a year to this state has the substantial nexus with this state and is engaged in business in this state under subdivision (b) of 6203: "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." We do not believe that the Quill case calls for a different result. We believe the court clearly distinguished its holding in that case from other cases such as this which involve a physical presence in the state of a person against whom the state would impose a use tax collection duty. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:sr