Understanding the Application of California Sales Tax - A California Tax Practice Insights Commentary

Understanding the Application of California Sales Tax - A California Tax Practice Insights Commentary

By Robert Steiger - Tax Counsel, Chevron Corporation*

General Editor, Charles J. Moll III - Winston & Strawn LLP

* The author, Robert Steiger, is writing in his capacity as a private attorney, and not as an employee of Chevron Corporation. Accordingly, nothing contained in this Practice Insight should be construed as the official or unofficial position of Chevron Corporation or any of its affiliates.

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INSIGHT

Under Cal. Rev. & Tax. Code Section 6010.5 California sales tax is imposed on all taxable retail sales occurring in the state. The incidence of the sales tax is exclusively on the vendor whereas both the buyer and seller are jointly and severally liable for a use tax transaction. Since the state will only assess the seller when seeking to collect under reported sales tax, it is extremely important for Practitioners to fully understand the nuances regarding what constitutes sales taxable transactions. Once a transaction is identified as subject to sales tax, it is customary for the seller to seek tax reimbursement from the buyer at the time of sale. Note that buyers may object to paying sales tax reimbursement months or years down the road if the seller waits until receiving a tax assessment from the state before requesting such reimbursement. This insight focuses on the types of delivery methods that may otherwise subject transactions to the California's sales tax.

ANALYSIS

State sales tax applies to taxable sales where the title to the property is transferred within the state. All gross receipts are subject to state sales tax.

Sales tax applies to taxable sales if the place of sale occurs in the state. Pursuant to Section 6010.5 the place of sale is deemed to occur where the property is physically located at the time the act constituting the sale takes place (essentially at the point time in time that title and possession to the property transfers to the buyer).

There is a general presumption in California that all gross receipts are subject to the sales tax. The sales tax rules are not rendered inapplicable solely because the property is delivered from outside the borders into the state, or precedes a movement of the property from within this state to a point outside the borders. Other than those exemptions specifically enumerated under California law, the only restriction that prohibits California from subjecting a transaction to the state's sales tax are the constitution limitations impacting interstate commerce espoused under the United States Constitution.

The general rule for interstate sales is that when title to property transfers outside the state the sales tax does not apply, regardless of the seller's participation in California. The one exception, provided by Cal. Rev. & Tax. Code Section 6247, is if the purchaser is known by the seller to be a California resident, then the presumption is that the sale was for consumption in this state and California tax should be collected from the buyer. The buyer can always rebut the presumption by providing the seller with a written statement that the property was purchased for use at a designated location outside the state.

A sale is subject to state sales tax if it is made by a California vendor and delivery occurs in within the state. However, if the in state delivery is made by a common carrier and the vendor does not engage in in-state participation in the sale the transaction will not be subject to state sales tax, but rather to California use tax.

A taxable transaction will be subject to California sales tax if the sale is made by a California vendor and delivery occurs in the state. Practitioners should be aware that the State Board of Equalization may assert that a sale occurs within California if an out of state vendor delivers the taxable purchase into the state via use of a company vehicle or an agent's vehicle and/or if the local sales office, sales person or agent participates in the transaction in any way (e.g., installs the items at the buyers California location or trains the buyers on how to use the item at the California location). Note that the out of state vendor will be solely liable for reporting and remitting California sales tax on the gross receipts if the sale is deemed to occur within the state.

A taxable transaction will not be subject to California sales tax if the in-state delivery is made by common carrier, originates from outside the state, and is made by a vendor who does not engage in in-state participation of the sale. This transaction however will be subject to California's use tax and the vendor may have a use tax collection requirement depending on whether it has sufficient nexus with the state. The requirement to report use tax is joint and several liability between the buyer and seller and thus the buyer will be required to accrue and remit use tax to the extent that such tax is not collected and reported by the seller.

Deliveries made out of state are generally not subject to state sales tax provided the purchased product is shipped directly to the purchaser's out of state location and is to be used outside the state. However, neither the purchaser nor its agent may pick up the purchased property within the state.

Pursuant to Cal. Rev. & Tax. Code Section 6396 sales tax will not apply on transactions for delivery outside the state if the California vendor ships the taxable product directly to the purchaser's out-of-state location, for use outside California. The delivery can be via common carrier, customs broker, export packer, forwarding agent or via the vendor or vendor agent's vehicle.

Practitioners should be aware that such exception does not apply if the out-of-state purchaser or the purchaser's agent picks up the taxable property in California and then escorts or causes the property to be delivered outside the state. In this situation, the transaction will be subject to California sales tax since the sale will be deemed to occur within the state, regardless of whether the purchase is ultimately delivered for use outside the sate. This rule applies to both deliveries destined for other states or for export to foreign countries.

Example 1. California vendor sells taxable equipment to purchaser for delivery and use outside the state. Vendor uses its own trucks to deliver the equipment from its California warehouse directly to the customer's out of state location. The transaction is not subject to California sales tax because the transaction is deemed to be an interstate sale and California is precluded from taxing the transaction.

Example 2. Same facts as Example #1 except that the purchaser picks up the equipment at the vendor's California warehouse and immediately transports it out of state (without any intervening use) for use at its out of state facility. This transaction is subject to California sales tax since the sale will be deemed to occur in California since title and possession transferred within the state. California is entitled to tax sales that occur wholly within the state regardless of when the property remains in the state or is immediately delivered for use outside the state.

Example 3. Same facts as Example #1 except that the equipment is destined for Asia and the purchaser's agent arranges to take title of the equipment in California prior to reaching an irrevocable commitment to exportation (see 18 CCR § 1620 for guidance). This transaction will also be subject to California sales tax since title and possession occurs within the state irrespective of whether the sole reason is for administrative convenience of passing customs or that the equipment is intended for use solely in Asia.

Practitioners should refer to SBE Publication 101 (available on the State Board of Equalization website at www.boe.ca.gov) for specific rules on what documentation is sufficient to prove on tax audit that the sale and delivery of interstate purchases occur outside the state.

California passed a law to create a presumption of nexus in the case of remote sellers with in-state affiliates. Enactment of the law has recently been postponed.

California recently enacted an "Amazon" tax law effective for purchases made on or after July 1, 2011. Companies with physical presence in California can place links to Amazon, or other third party vendors, on their websites and then under an affiliate marketing agreement with the vendor, collect money if someone clicks on that link and ultimately makes a purchase. Under the new California law, if a vendor places an affiliate link on a blog or website, that vendor is included in the definition of "retailer engaged in business in the state" and the obligation to collect sales tax would apply assuming certain monetary thresholds are met. See 2011 Bill Text CA A.B. 28A. Soon after the bill was signed into law by Governor Jerry Brown, Amazon announced that they were ending their affiliate relationship program in California and the company began taking steps to initiate a referendum to overturn the law.

On September 23, 2011, Governor Jerry Brown signed AB 155 which postponed the enactment of the new law mentioned above. Under the new law, online companies have until July 2012 to persuade Congress to create a national system for the collection of sales tax in the context of online sales from out-of-state retailers. If they are unsuccessful, then the obligation to collect tax on internet purchases to in-state residents will apply.  But, if Congress does act to create a national system for collecting sales tax, California will acquiesce to that law with collection beginning in January 2013.

These materials are published solely as reference materials for use by attorneys and other tax professionals.  They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.

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RELATED LINKS:  For additional information about sales tax dynamics in California and in other states, see: