business tax and fee division m e m o r a n d u m · 1/3/2020 · state of california california...

State of California California Department of Tax and Fee Administration Business Tax and Fee Division

M e m o r a n d u m

To: Mr. Nicolas Maduros Date: January 3, 2020

Director (MIC 104)

From: Trista Gonzalez, Chief

Tax Policy Bureau (MIC 92)

Subject: Request approval to file proposed amendments to Regulations

1684 and 1827 – Collection of Use Tax by Retailers – with the

Office of Administrative Law

We request your approval to amend Sales and Use Tax Regulation 1684, Collection of Use

Tax by Retailers, and Transactions and Use Tax Regulation 1827, Collection of Use Tax by

Retailers. Our proposed amendments clarify when a retailer is engaged in business in this

state and required to collect state use tax from its customers. The proposed amendments also

clarify when a retailer is engaged in business in a special taxing district and required to collect

district use tax from its customers. The proposed amendments implement, interpret, and make

specific the changes, including the addition of economic nexus provisions, to Revenue and

Taxation Code (RTC) sections 6203 and 7262 enacted by Assembly Bill No. (AB) 147 (Stats.

2019, ch. 5) and amendments to RTC sections 6203 and 7262 enacted by Senate Bill No. (SB)

92 (Stats. 2019, ch. 34). Once approved, we will file the proposed amendments with the

Office of Administrative Law and request they be printed in the California Code of

Regulations in accordance with the exemption from the Administrative Procedure Act’s

rulemaking requirements in AB 147.

Background

Under the California Sales and Use Tax Law (RTC, § 6001 et seq.), sales tax is imposed on

retailers, and applies to retailers’ gross receipts from their retail sales of tangible personal

property made within California, unless specifically exempted or excluded from the tax.

(RTC, § 6051.) When sales tax does not apply, use tax generally applies to the sales price of

tangible personal property that was purchased from a retailer for storage, use, or other

consumption in California and actually stored, used, or otherwise consumed in the state.

(RTC, §§ 6201. 6401.) Use tax applies to taxable purchases of tangible personal property

from retailers, whether, for example, the purchase is made by mail order, telephone, or

internet, and the person actually storing, using, or otherwise consuming the property

purchased from a retailer is liable for the tax. (RTC, § 6202.) The state’s sales tax and use tax are mutually exclusive meaning either sales tax or use tax applies to a single transaction,

but not both. (See Regulation 1620, Interstate and Foreign Commerce, for a detailed

explanation of when sales and use tax applies to sales of goods being shipped into and out of

California.)

California consumers are generally required to report and pay the use tax on their taxable

Mr. Nicolas Maduros - 2 - January 3, 2020

purchases to the state. However, pursuant to RTC section 6203, retailers that are “engaged in business” in this state are required to collect the use tax on their taxable sales to California consumers, and give the consumers a receipt for the tax. Consumers remain liable for the use

tax, unless they obtain a receipt from a retailer that is registered with the CDTFA. (RTC,

§ 6202.) Retailers that are engaged in business in this state and selling tangible personal

property for storage, use, or other consumption in California are required to register with the

CDTFA (RTC, § 6226) and the CDTFA requires such retailers to register for a Certificate of

Registration – Use Tax, unless they are also required to hold a seller’s permit. Additionally,

retailers who are not engaged in business in California may voluntarily apply for a Certificate

of Registration – Use Tax. A holder of this certificate is required to collect use tax from

purchasers, give receipts therefore, and pay the tax to the CDTFA in the same manner as a

retailer engaged in business in California. (Reg. 1684, subd. (e).)

Under the California Transactions and Use Tax Law (RTC, § 7251 et seq.), cities, counties,

and other governmental entities (districts) may impose transactions (sales) taxes on the retail

sale of tangible personal property in the district and use taxes on the purchase of tangible

personal property from a retailer for storage, use, or other consumption in the district.

Districts are required to contract with the CDTFA to administer and collect district taxes

(RTC, § 7270) and district tax ordinances are required to contain provisions identical to those

contained in the Sales and Use Tax Law except that the name of the taxing district is

substituted for that of the state. (RTC, §§ 7261, 7262.) As relevant here, RTC section 7262,

subdivision (a), requires district use tax ordinances to incorporate the provisions of RTC

section 6203 requiring retailers engaged in business in the state to collect the use tax, except

that the name of the taxing district is substituted for the word “state” in the phrase “retailer

engaged in business in this state” and in the definition of that phrase. As such, only retailers

engaged in business in a taxing district are required to collect that district’s use tax on their

sales for delivery into the district and remit it to the CDTFA. Also, RTC section 7262

specifically provides that the term “retailer engaged in business in the district” includes any retailer of specified vehicles, vessels and aircraft and requires such a retailer to collect use tax

from any purchaser who registers or licenses a specified vehicle, vessel, or aircraft at an

address in a taxing district.

In Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274 (Complete Auto Transit), the

U.S. Supreme Court held that a tax challenged under the U.S. Constitution’s Commerce

Clause will be sustained when the tax: (1) is applied to an activity with a substantial nexus

with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate

commerce, and (4) is fairly related to the services provided by the State. In Quill Corp. v.

North Dakota (1992) 504 U.S. 298 (Quill), the U.S. Supreme Court held that a retailer does

not have a substantial nexus with a state for purposes of the U.S. Constitution’s Commerce

Clause, unless it has a physical presence in the state. In Quill, the Court also affirmed the

“sharp distinction,” established in National Bellas Hess, Inc. v. Department of Revenue of

Illinois (1967) 386 U.S. 753 (Bellas Hess), “between mail-order sellers with retail outlets,

solicitors, or property within a State” that can be required to collect the state’s sales or use tax, “and those who do no more than communicate with customers in the State by mail or common carrier as a part of a general interstate business” that cannot be required to collect

the state’s sales or use tax.


Prior to 2011, the operative provisions of RTC section 6203, subdivision (c)(1) through (3),

provided that the term “retailer engaged in business in this state” means and includes the

following three types of retailers: (1) “[a]ny 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”; (2) “[a]ny 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”; and (3) “[a]s respects a lease, any retailer deriving rentals from a lease of tangible personal

property situated in this state.”

However, the definition of “retailer engaged in business in this state” in RTC section 6203, subdivision (c), was amended by AB 155 (Stats. 2011, ch. 313) operative September 15, 2012.

The amendments added a long-arm statute providing that the term “retailer engaged in

business in this state” means “any retailer that has a substantial nexus with this state for purposes of the commerce clause of the United States Constitution.” The amendments further

provided that the term “retailer engaged in business in this state” specifically includes, but is

not limited to, the three types of retailers engaged in business in this state that are listed in

subdivision (c)(1) through (3). The amendments also added subdivision (c)(4) and (5) to RTC

section 6203 to respectively provide that the term “retailer engaged in business in this state” includes “[a]ny retailer that is a member of a commonly controlled group . . . and is a member

of a combined reporting group . . . that includes another member of the retailer’s commonly

controlled group that, pursuant to an agreement with or in cooperation with the retailer,

performs services in this state in connection with tangible personal property to be sold by the

retailer” (retailer with commonly controlled group nexus); and “[a]ny retailer entering into an

agreement or agreements under which a person or persons in this state, for a commission or

other consideration, directly or indirectly refer potential purchasers of tangible personal

property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise,

provided that [other conditions are met]” (retailer with affiliate nexus).

Regulation 1684 was also amended, operative September 15, 2012, to implement, interpret,

and make specific the amendments to RTC section 6203 made by AB 155. As relevant here,

the amendments incorporated the provisions of the long-arm statute into Regulation 1684,

subdivision (b)(1). The amendments established a rebuttable presumption in Regulation

1684, subdivision (b)(2), that a retailer is engaged in business in this state if the retailer has

any physical presence in California. The amendments clarified in Regulation 1684,

subdivision (c), that RTC section 6203, subdivision (c), as amended by AB 155, provides non-

exhaustive examples of retailers engaged in business in this state. The amendments clarified

in Regulation 1684, subdivision (c)(1), that the term “retailer engaged in business in this state” includes the types of retailers listed in RTC section 6203, subdivision (c)(1) through (3), and

also a retailer that “owns or leases real or tangible personal property, including, but not limited

to, a computer server, in California.” The amendments incorporated the commonly controlled

group nexus provisions in RTC section 6203, subdivision (c)(4), into Regulation 1684,

subdivision (c)(2). The amendments also incorporated the affiliate nexus provisions in RTC

section 6203, subdivision (c)(5), into Regulation 1684, subdivision (c)(3).


California followed the U.S. Supreme Court’s holding in Quill, so only retailers with a

physical presence in this state have historically been required to collect and remit California

use tax under RTC section 6203. Examples of having a physical presence in California

include having a warehouse, an office, or other place of business in California, or any agent,

representative or salesperson operating in California under the retailers’ authority to sell,

deliver, or install tangible personal property.

As stated above, subject to certain additional provisions regarding specified vehicles, vessels,

or aircraft, RTC section 7262 requires district use tax ordinances to incorporate the provisions

of RTC section 6203 requiring retailers engaged in business in the state to collect use tax, but

also requires the name of the taxing district to be substituted for the word “state” in the phrase

“retailer engaged in business in this state” and in the definition of that phrase. As such,

historically, a retailer was also only engaged in business in a district if its business was located

in the district or if it had some other form of physical presence in the district, unless the retailer

was selling specified vehicles, vessels, and aircraft. The September 15, 201 2, amendments to

RTC section 6203 are incorporated into the definition of “retailer engaged in business in the

district” pursuant to RTC section 7262. However, Regulation 1827, which implements,

interprets and makes specific the provisions of RTC section 7262, has not been amended to

reflect those changes.

As relevant here, subdivision (c) of Regulation 1827 currently provides that the term “‘retailer engaged in business in the district’ includes any of the following:

(1) 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 in the district.

(2) Any retailer having any representative, agent, salesman, canvasser or solicitor operating

in the district 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.

(3) As respects a lease, any retailer deriving rentals from a lease of tangible personal property

situated in the district.

(4) On and after January 1, 1988, any retailer of vehicles subject to registration pursuant to

Chapter 1 (commencing with Section 4000) of Division 3 of the Vehicle Code, aircraft

licensed in compliance with Section 21411 of the Public Utilities Code, or undocumented

vessels registered under Division 3.5 (commencing with Section 9840) of the Vehicle Code.”

Wayfair Decision

To challenge Quill, South Dakota enacted a law requiring a seller that does not have a physical

presence in South Dakota to collect South Dakota’s sales tax if during the previous or current

calendar year the seller’s gross revenue from sales into South Dakota exceeded $100,000 or

the seller made sales into South Dakota in 200 or more separate transactions. On June 21,

2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc., et al

(Wayfair). In Wayfair, the Court held that South Dakota’s law satisfied the substantial nexus requirement from Complete Auto Transit and overruled the holdings in Quill and Bellas Hess.


Special Notices - Wayfair

Pursuant to the long-arm statute set forth in RTC 6203, subdivision (c), and Regulation 1684,

subdivision (b)(1), the CDTFA determined that any retailer whose sales into California

created a substantial nexus with California based on the sales thresholds upheld in the Wayfair

decision (sales in excess of $100,000 or 200 or more separate transactions) was a retailer

engaged in business in the state for purposes of RTC section 6203. Therefore, the CDTFA

issued a special notice in December 2018, which required such retailers to register and collect

California state use tax on their taxable sales on and after April 1, 2019, regardless of whether

they had a physical presence in California. (See Special Notice L-565, “New Use Tax

Collection Requirements for Out-of-State Retailers Based on Sales into California Effective

April 1, 2019.”)

In addition, the CDTFA determined that any retailer whose sales into a taxing district

exceeded the sales thresholds upheld in the Wayfair decision was a retailer engaged in

business in the district for purposes of RTC section 7262. Therefore, the CDTFA issued a

special notice in December 2018, which required retailers engaged in business in a taxing

district based on the sales thresholds upheld in the Wayfair decision to collect that district’s

use tax on their sales on and after April 1, 2019, regardless of whether they had a physical

presence in the district. (See Special Notice L-591, “New District Use Tax Collection

Requirements for All Retailers Effective April 1, 2019.”)

Assembly Bill No. 147

On April 25, 2019, the Legislature enacted AB 147 in order to modernize California law to

include economic nexus provisions that are consistent with the Wayfair decision. AB 147

added a new subdivision (c)(4) to RTC section 6203, operative April 1, 2019, to provide that

the term retailer engaged in business in this state includes “[a]ny retailer that, in the preceding

calendar year or the current calendar year, has total combined sales of tangible personal

property for delivery in this state by the retailer and all persons related to the retailer that

exceed five hundred thousand dollars ($500,000).” New subdivision (c)(4) also provided that

“a person is related to another person if both persons are related to each other pursuant to

Section 267(b) of Title 26 of the Internal Revenue Code and the regulations thereunder.” The

sales threshold added to section 6203 is substantially higher than the sales threshold provided

in the South Dakota law and retroactively superseded the guidance provided in the CDTFA’s special notice regarding section 6203. Also, AB 147 repealed the commonly controlled group

nexus and affiliate nexus provisions that were previously in RTC section 6203, subdivision

(c)(4) and (5), operative April 1, 2019, but provided in RTC section 6203, subdivision (f), that

the prior un-amended version of RTC section 6203 would become operative, again, on the

date of a final decision of a court of competent jurisdiction holding that the amendments to

RTC section 6203 violate the substantial nexus standard of the Commerce Clause.

Additionally, AB 147 added a new subdivision (a)(1) to RTC section 7262, operative

April 1, 2019, to provide that “‘[a] retailer engaged in business in the district’ shall also

include any retailer that, in the preceding calendar year or the current calendar year, has total

combined sales of tangible personal property in this state or for delivery in the state by the

retailer and all persons related to the retailer that exceeds five hundred thousand dollars

($500,000).” The amendments also provided that “a person is related to another person if


both persons are related to each other pursuant to Section 267(b) of Title 26 of the United

States Code [(Internal Revenue Code or IRC)] and the regulations thereunder.” The sales

threshold added to section 7262 is different from the sales threshold provided in the South

Dakota law and retroactively superseded the guidance provided in the CDTFA’s special notice regarding section 7262.

Furthermore, section 7, subdivision (a), of AB 147 provides that the “Administrative

Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title

2 of the Government Code) shall not apply to any guidelines, criterion, bulletin, manual,

instruction, order, standard of general application, or other rule, which is a regulation as

defined in Section 11342.600 of the Government Code, established or issued by the [CDTFA]

before January 1, 2021, to implement, interpret, or make specific the amendments made to

Sections 6203 and 7262 of the Revenue and Taxation Code by [AB 147].”

AB 147 also added chapter 1.7 to part 1 of division 2 of the RTC, which is titled the

Marketplace Facilitator Act (MFA), to address sales of tangible personal property through

marketplaces. The MFA is operative October 1, 2019, and the CDTFA is proposing a separate

regulation to implement the MFA. Staff will seek input from interested parties as to how to

implement, interpret, and make specific the provisions of the MFA through a separate

interested parties and rulemaking process.

Senate Bill No. 92

On June 27, 2019, the Legislature enacted SB 92. SB 92 amended RTC section 6203,

subdivision (c)(4)(B), and RTC section 7262, subdivision (a)(1), to clarify that a person is

related to another person if the persons are related to each other pursuant to “Section 267(b) of the Internal Revenue Code” and the regulations thereunder. SB 92 also further amended

RTC section 7262 to change the ope rative date of new subdivision (a)(1) from April 1, 2019,

to April 25, 2019 (the effective date of AB 147).

Staff’s Initial Proposed Amendments to Regulation 1684

Staff determined that there were inconsistencies with Regulation 1684 because it currently

indicates:

• a retailer must have some physical presence in California to be a “retailer engaged in business in this state,” and

• the term “retailer engaged in business in this state” includes a retailer with commonly controlled group nexus or affiliate nexus.

Additionally, staff determined that there were inconsistencies with Regulation 1684 because

it does not:

• indicate that the term “retailer engaged in business in this state” includes a retailer whose total combined sales of tangible personal property for delivery in this state

exceed the $500,000 sales threshold in RTC section 6203, subdivision (c)(4),

• specifically require retailers engaged in business in this state to register for a

Certificate of Registration – Use Tax, and


• explain how long a retailer engaged in business in this state is required to remain

registered with the CDTFA to collect use tax.

As explained in the May 10, 2019, Discussion Paper, staff recommended making the

following amendments to Regulation 1684 to address those issues:

• Renumbering subdivision (b)(3) as subdivision (b)(2)(B), and adding a new

subdivision (b)(3) to incorporate the new economic nexus provision added to RTC

section 6203, subdivision (c)(4), by AB 147, operative on and after April 1, 2019, and

include provisions with examples to help retailers determine if they are required to

register with the CDTFA on or after April 1, 2019, based on their sales for delivery in

California.

• Amending subdivision (b)(1) to clarify that the term “retailer engaged in business in this state” includes a retailer described in new subdivision (b)(3) on and after

April 1, 2019.

• Amending subdivisions (b)(1), (b)(2) and (c)(1) to clarify that the regulation’s current provisions incorporating the long-arm statute in RTC section 6203, subdivision (c),

establishing a rebuttable presumption that a retailer is engaged in business in this state

if the retailer has any physical presence in California, and providing that the term

“retailer engaged in business in this state” includes, but is not limited to, the four types of retailers engaged in business in this state listed in Regulation 1684, subdivision

(c)(1), are all operative on and after September 15, 2012.

• Amending subdivisions (b)(1), (c)(2) and (c)(3) to clarify that the commonly

controlled group nexus and affiliate nexus provisions in Regulation 1684, subdivision

(c)(2) and (c)(3), are operative from September 15, 2012, through March 31, 2019,

because they were repealed by AB 147.

• Making minor amendments to replace “World Wide Web” with “web” and replace “substantial nexus with” with “physical presence in” in subdivision (d)(1) regarding

webpages and internet service providers.

• Renaming subdivision (e), as “Registration.”

• Adding a new subdivision (e)(1) to explain that retailers required to register with the

CDTFA pursuant to Regulation 1684 must register for a Certificate of Registration – Use Tax.

• Reformatting the current text of subdivision (e) as subdivision (e)(2), clarifying that

the current text permits retailers who are not engaged in business in this state to

“voluntarily” register with the CDTFA to collect use tax, and deleting the last sentence

from the current text regarding certificates issued prior to September 11, 1957.

• Adding a new subdivision (e)(3) to clarify how long retailers engaged in business in

this state are required to stay registered with the CDTFA that is based on the provisions

of RTC section 6203, subdivision (c)(4), regarding nexus-creating sales activity

occurring in the preceding or current calendar year.


• Adding a new subdivision (e)(4) to clarify a retailer’s options when the retailer is no longer required to be registered with the CDTFA pursuant to Regulation 1684 and

provide examples.

• Reformatting subdivision (i), regarding the 2012 amendments to Regulation 1684, as

subdivision (i)(1), and revising the language in that subdivision to make it more

concise.

• Adding a new subdivision (i)(2) to clarify that the current amendments are not

retroactive.

• Adding a new subdivision (i)(3) to clarify that if the amendments made to RTC section

6203 by AB 147 are held in a final decision of a court of competent jurisdiction to

violate the substantial nexus standard of the commerce clause of the U.S. Constitution,

then the economic nexus provisions being added to subdivision (b)(3) of

Regulation 1684 will become inoperative and the commonly controlled group nexus

and affiliate nexus provisions in subdivision (c)(2) and (c)(3) of Regulation 1684 will

become operative as of the date of that court’s decision.

Staff’s Initial Proposed Amendments to Regulation 1827

Staff determined that there were issues with Regulation 1827 because Regulation 1827:

• is not consistent with all the current provisions of Regulation 1684 that continue to

apply after the enactment of AB 147 and SB 92, including the amendments made to

Regulation 1684 to implement the long-arm statute in RTC section 6203.

• is not consistent with the addition of the economic nexus provision to RTC section

7262 b y AB 147.

• provides for a retailer to voluntarily register for a Certificate of Registration – Use Tax

to collect district use taxes, however, the provision is problematic because a retailer

that voluntarily registers for a Certificates of Registration – Use Tax is required to

collect state use tax and any retailer that holds a Certificate of Registration – Use Tax

may voluntarily collect district use taxes.

• does not explain how long a retailer engaged in business in a district is required to

collect that district’s use tax.

Staff also recommended making the following amendments to Regulation 1827 to address

those issues:

• Amending subdivision (a) to permit a retailer that is not engaged in business in a

district to voluntarily collect that district’s use tax.

• Adding new subdivision (b)(4) to clarify how long retailers engaged in business in a

district are required to collect that district’s use tax. The new subdivision is based on

the provisions of RTC section 7262, subdivision (a)(1), regarding sales activity

occurring in the preceding or current calendar year, and it is consistent with the

provisions staff recommends including in new subdivision (e)(3) of Regulation 1684.


• Deleting subdivisions (c)(1) through (3), which set forth specific examples of a retailer

engaged in business in a district, and replacing them with new subdivision (c)(1),

which incorporates by reference the following provisions of Regulation 1684, but

requires the name of the district to be substituted for the state:

o The definition of retailer engaged in business in the state set forth in subdivision

(b)(1),

o The rebuttable presumption set forth in subdivision (b)(2),

o The nonexhaustive list of examples of retailers engaged in business in this state

listed in subdivision (c), and

o The exceptions set forth in subdivision (d).

Staff recommended this amendment in order to clarify that RTC section 7262,

subdivision (a), incorporates the definition of a “retailer engaged in business in this state” into the definition of a “retailer engaged in business in the district” including

those amendments that became operative on September 15, 2012, as well as any future

amendments. Staff believes that replacing the current provisions with references to

Regulation 1684 eliminates any ambiguity as to the definition of “retailer engaged in business in the district” without requiring further amendment to Regulation 1827 in

the event of future changes to the definition of “retailer engaged in business in the

state.”

• Renumbering existing subdivision (c)(4) as subdivision (c)(2), and making minor

amendments.

• Adding a new subdivision (c)(3) to incorporate the new economic nexus provision

added to RTC section 7262, subdi vision (a)(1), by AB 147.

• Adding provisions to new subdivision (c)(3) to help retailers determine if they are

required to collect district use tax on or after April 1, 2019, based on their sales in

California and for delivery in California.

• Adding new subdivision (e) to clarify that district use taxes required to be collected

pursuant to Regulation 1827 and any amounts collected as district use tax constitute

debts owed by the retailer to the district based on the provisions of RTC section 6204,

which are required to be incorporated into district’s use tax ordinances by RTC section

7262, subdivision (a).

• Adding new subdivision (f) to clarify that when a retailer collects excess district use

tax from a customer, the CDTFA will only refund the excess use tax to the customer

and not to the retailer based on the provisions of RTC section 6901, which are required

to be incorporated into district’s use tax ordinances by RTC section 7262,

subdivision (a).

Discussion

Following the May 23, 2019, interested parties meeting, staff received written comments in a

June 7, 2019, letter submitted by Ms. Brenda Narayan on behalf of MuniServices. (See

Exhibit 3.) MuniServices stated it was satisfied with the proposed clarifications, including


clarification that district taxes must be collected by any retailer meeting the $500,000

threshold. MuniServices also said that the Legislature’s decision to raise the economic nexus

thresholds to $500,000 “will result in some State and local revenue losses” and said that it

hopes that the CDTFA will monitor and measure these revenues as such data would be helpful

in measuring the actual cost of the higher thresholds over time as internet sales continue to

grow. Staff appreciates the input from MuniServices and notes that the sales thresholds are

set forth in the RTC and CDTFA does not have the authority to change them, but staff is

mindful that a higher or lower threshold will affect State and local revenue.

Staff also received written comments in a June 6, 2019, letter submitted by the California

Taxpayer Association (CalTax). (See Exhibit 4.) CalTax asked several questions regarding

the audits and appeals procedures, including the scope of audits, as well as the impact on

foreign sellers. These concerns were forwarded to the applicable program areas responsible

for the implementation of AB 147 and the development of audit policies and procedures. Staff

does not believe any revisions to the proposed amendments are warranted based on these

comments. CalTax also sought clarification as to whether remote sellers who registered with

the CDTFA to collect California use tax pursuant to the direction and thresholds provided in

the CDTFA’s December 2018 Special Notice and who no longer make retail sales that exceed

the threshold established by AB 147 are able to deregister and stop collecting California use

tax. Staff notes that the CDTFA issued an April 2019 Special Notice, which specifies that a

remote seller who does not meet the $500,000 sales threshold pursuant to AB 147 and is not

otherwise engaged in business in California may close its account (deregister). The

April 2019 Special Notice also advised that any amount of use tax collected by a retailer must

be paid to the CDTFA. CalTax asked whether a retailer must collect any use tax on the sale

that causes the retailer to exceed the threshold for the calendar year. As provided in the

example that staff proposes to add to subdivision (b)(3)(B) of Regulation 1684, a retailer is

required to register and collect use tax on its retail sales “made after” the sale which causes it

to exceed the threshold. CalTax also made a comment with respect to trailing nexus and

CDTFA’s suggestion that a retailer remain registered if it anticipates that it will exceed the

threshold in the current year. CalTax asks whether CDTFA has considered that it may be

difficult for a retailer to estimate with certainty its projected sales. CalTax also asks whether

CDTFA would impose penalties on retailers who choose not to voluntarily register because

they did not believe their sales would exceed the threshold and whether CDTFA considered

providing incentives or protection for retailers who voluntarily register to collect and remit

tax. Staff understands the difficulty in estimating a retailer’s sales with certainty. As such,

staff recommended a retailer remain registered if it anticipates exceeding the sales threshold,

so that the retailer would not have to continuously monitor sales throughout the year to

determine the precise moment that it exceeded the sales threshold. Staff also notes that a

retailer who remains registered to collect use tax may help its customers by doing so, because

the customer would not have to monitor whether a retailer is collecting the applicable use tax

from year to year to determine whether it would need to self-accrue and report the use tax.

There are no statutory provisions that authorize a penalty for not voluntarily registering to

collect use tax when a retailer is not engaged in business in this state. However, if a retailer

is engaged in business in this state (including exceeding the sales threshold in a current

calendar year) and fails to register or collect use tax, penalties ma y apply for failing to report

and pay the applicable use tax. Furthermore, there is no statutory authority to provide an

incentive to retailers who choose to voluntary register to collect use tax. Lastly, CalTax made


several comments regarding regulations to implement the MFA, including its thought that it

would be highly beneficial for stakeholders and the CDTFA to have a fair, transparent, and

open discussion regarding implementation of the MFA. As staff previously noted herein, a

separate interested parties and rulemaking process is planned for regulations regarding the

MFA. The interested parties process regarding the MFA will commence with the distribution

of an Initial Discussion Paper on October 4, 2019, followed by an interested parties meeting

on October 15, 2019, and welcomes input from all interested parties.

Recommendation

As a result of the recent legislation, staff recommends amending Regulations 1684 and 1827

to clarify the meaning of “retailer engaged in business in this state” and “retailer engaged in

business in the district,” as well as when retailers are required to register with the CDTFA and

collect use tax from their customers. After considering the written comments received

following the May 23, 2019, interested parties meeting, staff does not propose any substantive

revisions to its initially proposed amendments outlined above.

However, staff recommends renumbering subdivision (b)(2)(B) of Regulation 1684 as

subdivision (b)(3), renumbering new subdivision (b)(3) of Regulation 1684 as new

subdivision (b)(4), and revising the new subdivision to refer to “Internal Revenue Code section 267(b)” pursuant to the amendments to RTC section 6203 made by SB 92. Staff

recommends amendments to new subdivision (c)(3) of Regulation 1827 to change the

operative date of RTC section 7262’s economic nexus provision from April 1, 2019, to

April 25, 2019, revise the new subdivision to refer to “Internal Revenue Code section 267(b),” and to make other conforming changes pursuant to SB 92. Staff also recommends making

minor typographical corrections and other non-substantive amendments throughout the

regulation, including:

• Updating internal references to former subdivision (c)(2) which was renumbered as

subdivision (c)(4).

• Replacing “controverted” with “rebutted” in subdivision (b)(2).

Attached are a strikeout and underlined versions of Regulations 1684 and 1827 illustrating

the proposed changes. If you have any questions regarding this request, please contact

Mr. Robert Wilke, a t 1-916-445-2137.

Approved:

Nicolas Maduros, Director

TG:rsw


Attachments: Proposed Amendments to R egulation 1684 and 1827

Comments from MuniServices

Comments from CalTax

cc: Ms. Katie Hagen (MIC 104)

Ms. Susanne Buehler (MIC 43)

Mr. Robert Tucker (MIC 83)

Ms. Pamela Bergin (MIC 82)

Staff’s Recommended Revisions to Regulation 1684 Exhibit 1

Page 1 of 11

[Staff Note – Additions to the regulation are in blue with underline font. Deletions are in red

with strikethrough.]

Regulation 1684. Collection of Use Tax by Retailers.

(a) Collection of Use Tax by Retailers Engaged in Business in this State. Retailers engaged in

business in this state as defined in section 6203 of the Revenue and Taxation Code and making

sales of tangible personal property, the storage, use, or other consumption of which is subject to

theuse tax must register with the BoardDepartment and, at the time of making the sales, or, if the

storage, use or other consumption of the tangible personal property is not then taxable, at the

time it becomes taxable, collect the use tax from the purchaser and give the purchaser a receipt

therefor.

(b) General Definitions and Rebuttable Presumption.

(1) On and after September 15, 2012, Aa retailer is engaged in business in this state as

defined in section 6203 of the Revenue and Taxation Code if the retailer has a substantial

nexus with this state for purposes of the Commerce Clause (art. I, § 8, cl. 3) of the United

States Constitution or federal law otherwise permits this state to impose a use tax collection

duty on the retailer. Retailers engaged in business in this state include, but are not limited to,

retailers described in subdivision (b)(4), on and after April 1, 2019, retailers described in

subdivision (c)(1), on and after September 15, 2012, and retailers described in subdivision

(c)(2) and (3), from September 15, 2012, through March 31, 2019.

(2) Except as otherwise provided in this regulationsubdivisions (c) and (d), on and after

September 15, 2012, there is a presumption that a retailer is engaged in business in this state

as defined in section 6203 of the Revenue and Taxation Code if the retailer has any physical

presence in California.

A retailer may rebut the presumption if the retailer can substantiate that its physical presence

is so slight that the United States Constitution prohibits this state from imposing a use tax

collection duty on the retailer.

(3) A retailer does not have a physical presence in California solely because the retailer

engages in interstate communications with customers in California via common carrier, the

United States mail, or interstate telecommunication, including, but not limited to, interstate

telephone calls and emails. The rebuttable presumption in subdivision (b)(2) does not apply

to a retailer that does not have a physical presence in California.

(4) On and after April 1, 2019, a retailer is engaged in business in this state as defined in

section 6203 of the Revenue and Taxation Code if the total combined sales of tangible

personal property for delivery in California by the retailer and all persons related to the

retailer exceed five hundred thousand dollars ($500,000) in the preceding or current calendar

year. For purposes of this subdivision, a person is related to another person if both persons

are related to each other pursuant to Internal Revenue Code section 267(b) and the

regulations thereunder.


Page 2 of 11

(A) If the total combined sales of tangible personal property for delivery in California by

a retailer and all persons related to the retailer exceeded five hundred thousand dollars

($500,000) during calendar year 2018, or the first quarter of calendar year 2019, then the

retailer is required to be registered with the Department and is required to begin

collecting use tax on April 1, 2019.

Example 1: Retailer A has no physical presence in California, and uses its own website to

sell goods at retail. Retailer A’s gross revenue from sales of goods for delivery in

California during calendar year 2018 exceeded $500,000. Therefore, on April 1, 2019,

retailer A is a retailer engaged in business in this state. Retailer A is required to be

registered with the Department on April 1, 2019, and is required to collect use tax on its

retail sales to California customers on and after April 1, 2019.

Example 2: Retailer B has no physical presence in California, and uses its own website to

sell goods at retail. Retailer B’s gross revenue from sales of goods for delivery in

California did not exceed $500,000 during calendar year 2018, but did exceed $500,000

during the period from January 1, 2019 through March 31, 2019. Therefore, on April 1,

2019, Retailer B is a retailer engaged in business in this state. Retailer B is required to be

registered with the Department on April 1, 2019, and is required to collect use tax on its

retail sales to California customers on and after April 1, 2019.

(B) If the total combined sales of tangible personal property for delivery in California by

a retailer and all persons related to the retailer exceeded five hundred thousand dollars

($500,000) during calendar year 2019, but after March 31, 2019, or during any

subsequent calendar year, the retailer is required to register with the Department and

begin collecting use tax immediately after the sale was made that exceeded the five

hundred thousand dollar ($500,000) threshold.

Example: Retailer C has no physical presence in California and uses its own website to

sell goods at retail. Retailer C’s gross revenue from sales for delivery in California was

less than $500,000 during calendar year 2018 and during the period from January 1

through March 31, 2019. Therefore, on April 1, 2019, Retailer C was not a retailer

engaged in business in this state and was not required to be registered with the

Department or to collect use tax. However, on August 1, 2019, Retailer C made a retail

sale of jewelry for $900 that brought its total sales for delivery in to California to

$500,400 for calendar year 2019. Therefore, Retailer C is a retailer engaged in business

in this state immediately after the sale and is required to register with the Department and

begin collecting use tax on its retail sales to California customers made after the $900

sale of jewelry on August 1, 2019.

(c) Nonexhaustive Examples of Retailers Engaged in Business in this State.

(1) On and after September 15, 2012, Aa retailer is engaged in business in this state as

defined in section 6203 of the Revenue and Taxation Code if:

(A) The retailer owns or leases real or tangible personal property, including, but not

limited to, a computer server, in California; or


Page 3 of 11

(B) The retailer derives rentals from a lease of tangible personal property situated in

California (under such circumstances the retailer is required to collect the tax at the time

rentals are paid by the lessee); or

(C) The retailer maintains, occupies, or uses, permanently or temporarily, directly or


distribution, sales or sample room or place, warehouse or storage place, or other place of

business in California; or

(D) The retailer has a representative, agent, salesperson, canvasser, independent

contractor, solicitor, or any other person operating in California on the retailer’s behalf,

including a person operating in California 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, or otherwise establishing or maintaining a

market for the retailer’s products.

(2) From September 15, 2012, through March 31, 2019, Aa retailer is engaged in business in

this state as defined in section 6203 of the Revenue and Taxation Code if:

(A) The retailer is a member of a commonly controlled group, as defined in Revenue and

Taxation Code section 25105; and

(B) The retailer is a member of a combined reporting group, as defined in California

Code of Regulations, title 18, section 25106.5, subdivision (b)(3), that includes another

member of the retailer’s commonly controlled group that, pursuant to an agreement with

or in cooperation with the retailer, performs services in California in connection with

tangible personal property to be sold by the retailer, including, but not limited to, design

and development of tangible personal property sold by the retailer, or the solicitation of

sales of tangible personal property on behalf of the retailer. For purposes of this

paragraph:

(i) Services are performed in connection with tangible personal property to be sold

by a retailer if the services help the retailer establish or maintain a California market

for sales of tangible personal property; and

(ii) Services are performed in cooperation with a retailer if the retailer and the

member of the retailer’s commonly controlled group performing the services are

working or acting together for a common purpose or benefit.

(3) From September 15, 2012, through March 31, 2019, Aa retailer is engaged in business in

this state as defined in section 6203 of the Revenue and Taxation Code if the retailer enters

into an agreement or agreements under which a person or persons in this state, for a

consideration that is based upon completed sales of tangible personal property, whether

referred to as a commission, fee for advertising services, or otherwise, directly or indirectly

refer potential purchasers of tangible personal property to the retailer, whether by an Internet-

based link or an Internet website, or otherwise, provided that:


Page 4 of 11

(A) The total cumulative sales price of all of the tangible personal property the retailer

sold to purchasers in California that were referred to the retailer by a person or persons in

California pursuant to an agreement or agreements described above, in the preceding 12

months, is in excess of ten thousand dollars ($10,000); and

(B) The retailer, within the preceding 12 months, has total cumulative sales of tangible

personal property to purchasers in California in excess of one million dollars

($1,000,000).

The determination as to whether a retailer has made the requisite amount of sales to

purchasers in California during the preceding 12-month period shall be made at the end

of each calendar quarter. A retailer is not engaged in business in this state pursuant to

this paragraph if the total cumulative sales price of all of the tangible personal property

the retailer sold to purchasers in California that were referred to the retailer by a person or

persons in California pursuant to an agreement or agreements described above, in the

preceding 12 months, is not in excess of ten thousand dollars ($10,000), or if the retailer's

total cumulative sales of tangible personal property to purchasers in California were not

in excess of one million dollars ($1,000,000) in the preceding 12 months.

For purposes of this paragraph, the term "retailer" includes an entity affiliated with a

retailer within the meaning of Internal Revenue Code section 1504, which defines the

term "affiliated group" for federal income tax purposes.

(4) Paragraph (3) does not apply to an agreement under which a retailer purchases

advertisements from a person in California, to be delivered on television, radio, in print, on

the Internet, or by any other medium, unless:

(A) The advertisement revenue paid to the person in California consists of commissions

or other consideration that is based upon completed sales of tangible personal property,

and

(B) The person entering into the agreement with the retailer also directly or indirectly

solicits potential customers in California through the use of flyers, newsletters, telephone

calls, electronic mail, blogs, microblogs, social networking sites, or other means of direct

or indirect solicitation specifically targeted at potential customers in this state.

(5) For purposes of paragraph (3):

(A) A person that is an individual is in this state when the person is physically present

within the boundaries of California; and

(B) A person other than an individual is in this state when there is at least one individual

physically present in California on the person’s behalf.

(6) Paragraph (3) does not apply to a retailer’s agreement with any person, unless an

individual solicits potential customers under the agreement while the individual is physically

present within the boundaries of California, including, but not limited to, an individual who


Page 5 of 11

entered into the agreement directly with the retailer, an individual, such as an employee, who

is performing activities in California directly for a person that entered into the agreement

with the retailer, and any individual who is performing activities in California indirectly for

any person who entered into the agreement with the retailer, such as an independent

contractor or subcontractor.

(7) Paragraph (3) does not apply if a retailer can demonstrate that all of the persons with

whom the retailer has agreements described in paragraph (3) did not directly or indirectly

solicit potential customers for the retailer in California. A retailer can demonstrate that an

agreement is not an agreement described in paragraph (3) if:

(A) The retailer’s agreement:

(i) Prohibits persons operating under the agreement from engaging in any solicitation

activities in California that refer potential customers to the retailer including, but not

limited to, distributing flyers, coupons, newsletters and other printed promotional

materials or electronic equivalents, verbal soliciting (e.g., in-person referrals),

initiating telephone calls, and sending e-mails; and

(ii) If the person in California with whom the retailer has an agreement is an

organization, such as a club or a non-profit group, the agreement provides that the

organization will maintain on its website information alerting its members to the

prohibition against each of the solicitation activities described above;

(B) The person or persons operating under the agreement in California certify annually

under penalty of perjury that they have not engaged in any prohibited solicitation

activities in California at any time during the previous year, and, if the person in

California with whom the retailer has an agreement is an organization, the annual

certification shall also include a statement from the organization certifying that its

website includes information directed at its members alerting them to the prohibition

against the solicitation activities described above; and

(C) The retailer accepts the certification or certifications in good faith and the retailer

does not know or have reason to know that the certification or certifications are false or

fraudulent.

A retailer is excused from the requirement to obtain a certification if the person from whom

the certification is required is dead, lacks the capacity to make such certification, or cannot

reasonably be located by the retailer and there is no evidence to indicate that such person did

in fact engage in any prohibited solicitation activities in California at any time during the

previous year.

(8) For purposes of this subdivision:

(A) "Advertisement" means a written, verbal, pictorial, graphic, etc. announcement of

goods or services for sale, employing purchased space or time in print or electronic


Page 6 of 11

media, which is given to communicate such information to the general public. Online

advertising generated as a result of generic algorithmic functions that is anonymous and

passive in nature, such as ads tied to Internet search engines, banner ads, click-through

ads, Cost Per Action ads, links to retailers’ websites, and similar online advertising

services, are advertisements and not solicitations.

(B) "Individual" means a natural person.

(C) "Person" means and includes any individual, firm, partnership, joint venture, limited

liability company, association, social club, fraternal organization, corporation, estate,

trust, business trust, receiver, assignee for the benefit of creditors, trustee, trustee in

bankruptcy, syndicate, the United States, this state, any county, city and county,

municipality, district, or other political subdivision of the state, or any other group or

combination acting as a unit.

(D) "Solicit" means to communicate directly or indirectly to a specific person or specific

persons in California in a manner that is intended to and calculated to incite the person or

persons to purchase tangible personal property from a specific retailer or retailers.

(E) "Solicitation" means a direct or indirect communication to a specific person or

specific persons done in a manner that is intended to and calculated to incite the person or

persons to purchase tangible personal property from a specific retailer or retailers.

(F) "Solicit," "solicitation," "refer," and "referral" do not mean or include online

advertising generated as a result of generic algorithmic functions that is anonymous and

passive in nature, such as ads tied to Internet search engines, banner ads, click-through

ads, Cost Per Action ads, links to retailers’ websites, and similar online advertising

services.

(9) Examples:

(A) Corporation X is physically located in California and maintains a website at

www.corporationx.com. Corporation X enters into agreements with one or more hiking

gear and accessories retailers under which Corporation X maintains click-through

advertisements or links to each retailer’s website on Corporation X’s website at

www.corporationx.com and Corporation X’s webpage at

www.socialnetwork.com/corporationx in return for commissions based upon the retailers’

completed sales made to customers who click-through the ads or links on Corporation

X’s website and webpage. Corporation X also posts reviews at www.corporationx.com

of the products sold through the click-through ads and links on its website and webpage.

However, Corporation X does not engage in any solicitation activities in California that

refer potential customers to the retailer or retailers who have click-through ads or links on

its website or webpage. Therefore, paragraph (3) does not apply to the agreements

between Corporation X and the retailer or retailers who have ads or links on Corporation

X’s website or webpage.


Page 7 of 11

(B) Same as (A) above, except that Corporation X also enters into an agreement under

which Advertising Corporation places advertisements for www.corporationx.com on

other businesses’ websites and webpages, and mails or emails advertisements for

www.corporationx.com to anyone who signs up to receive such advertisements.

However, Corporation X does not engage in any solicitation activities in California that

refer potential customers to the retailer or retailers who have click-through ads or links on

its website or webpage and Advertising Corporation’s mailers and emails are

advertisements, not solicitations. Therefore, paragraph (3) does not apply to the

agreements between Corporation X and the retailer or retailers who have ads or links on

Corporation X’s website or webpage.

(C) Same as (B) above, except that an individual representative of Corporation X or any

other individual acting on behalf of Corporation X, including, but not limited to, an

employee or independent contractor of Corporation X or Advertising Corporation,

engages in solicitation activities, such as soliciting customers in person, soliciting

customers on the telephone, handing out flyers that are solicitations, or sending emails

that are solicitations, while physically present in California that refer potential California

customers to a retailer who has a click-through ad or link on Corporation X’s website or

webpage under Corporation X’s agreement with that retailer. Therefore, paragraph (3)

does apply to Corporation X’s agreement with that retailer and that retailer will be

required to register with the BoardDepartment to collect use tax if:

(i) The total cumulative sales price of all of the tangible personal property the retailer

sold to purchasers in California that were referred to the retailer by a person or

persons in California pursuant to an agreement or agreements described in paragraph

(3), in the preceding 12 months, is in excess of ten thousand dollars ($10,000); and

(ii) The retailer’s total cumulative sales of tangible personal property to purchasers

in California is in excess of one million dollars ($1,000,000) in the preceding 12

months.

(d) Exceptions.

(1) Webpages and Internet Service Providers. The use of a computer server on the Internet to

create or maintain a World Wide Webweb page or site by a retailer will not be considered a

factor in determining whether the retailer has a substantial nexus withphysical presence in

California, unless the computer server is located in California and the retailer owns or leases

the computer server. No Internet Service Provider, On-line Service Provider, internetwork

communication service provider, or other Internet access service provider, or World Wide

Webweb hosting services shall be deemed the agent or representative of any out-of-state

retailer as a result of the service provider maintaining or taking orders via a web page or site

on a computer server that is physically located in this state.

(2) Warranty and Repair Services. A retailer is not "engaged in business in this state" based

solely on its use of a representative or independent contractor in this state for purposes of

performing warranty or repair services with respect to tangible personal property sold by the

retailer, provided that the ultimate ownership of the representative or independent contractor


Page 8 of 11

so used and the retailer is not substantially similar. For purposes of this paragraph, "ultimate

owner" means a stock holder, bond holder, partner, or other person holding an ownership

interest.

(3) Convention and Trade Show Activities. For purposes of this subdivision, the term

"convention and trade show activity" means any activity of a kind traditionally conducted at

conventions, annual meetings, or trade shows, including, but not limited to, any activity one

of the purposes of which is to attract persons in an industry generally (without regard to

membership in the sponsoring organization) as well as members of the public to the show for

the purpose of displaying industry products or to stimulate interest in, and demand for,

industry products or services, or to educate persons engaged in the industry in the

development of new products and services or new rules and regulations affecting the

industry.

Except as provided in this paragraph, a retailer is not "engaged in business in this state"

based solely on the retailer’s convention and trade show activities provided that:

(A) For the period commencing on January 1, 1998 and ending on December 31, 2000,

the retailer, including any of his or her representatives, agents, salespersons, canvassers,

independent contractors, or solicitors, does not engage in those convention and trade

show activities for more than seven days, in whole or in part, in this state during any 12-

month period and did not derive more than ten thousand dollars ($10,000) of gross

income from those activities in this state during the prior calendar year;

(B) For the period commencing on January 1, 2001, the retailer, including any of his or

her representatives, agents, salespersons, canvassers, independent contractors, or

solicitors, does not engage in those convention and trade show activities for more than

fifteen days, in whole or in part, in this state during any 12-month period and did not

derive more than one hundred thousand dollars ($100,000) of net income from those

activities in this state during the prior calendar year.

A retailer coming within the provisions of this subdivision is, however, "engaged in business

in this state," and is liable for collection of the applicable use tax, with respect to any sale of

tangible personal property occurring at the retailer’s convention and trade show activities and

with respect to any sale of tangible personal property made pursuant to an order taken at or

during those convention and trade show activities.

(e) Retailers Not Engaged in Business in this StateRegistration.

(1) A retailer that is required to register with the Department pursuant to subdivision (a) must

register for a Certificate of Registration-Use Tax.

(2) Retailers who are not engaged in business in this state may voluntarily apply for a

Certificate of Registration-Use Tax. Holders of such certificates are required to collect use

tax from purchasers, give receipts therefor, and pay the tax to the Board Department in the

same manner as retailers engaged in business in this state. As used in this regulation, the term


Page 9 of 11

"Certificate of Registration-Use Tax" shall include Certificates of Authority to Collect Use

Tax issued prior to September 11, 1957.

(3) A retailer required to be registered with the Department is required to remain registered

with the Department during any calendar year that it has a physical presence in this state that

is sufficient to establish a substantial nexus with this state for purposes of the Commerce

Clause of the United States Constitution, including, but not limited to, a physical presence

described in subdivision (c)(1), or the total combined sales of tangible personal property for

delivery in this state by the retailer and all persons related to the retailer exceed the five

hundred thousand dollar ($500,000) threshold set forth in subdivision (b)(4), and during the

following calendar year. A retailer is not required to remain registered on January 1 of any

subsequent calendar year if:

(A) On that date and at all times during the preceding calendar year, the retailer does not

have a physical presence in this state sufficient to establish a substantial nexus with this

state for purposes of the Commerce Clause of the United States Constitution; and

(B) During the preceding calendar year, the retailer’s total combined sales of tangible

personal property for delivery in this state by the retailer and all persons related to the

retailer did not exceed the five hundred thousand dollar ($500,000) threshold set forth in

subdivision (b)(4).

(4) If a retailer is not required to remain registered pursuant to this regulation, then the

retailer may:

(A) Voluntarily maintain its registration with the Department and continue to collect,

report, and remit use tax in accordance with subdivision (e)(2); or

(B) Close its Certificate of Registration-Use Tax with the Department, and stop collecting

use tax after its certificate is closed.

However, the provisions of this regulation continue to apply to a retailer that closes its

Certificate of Registration-Use Tax, and a retailer should not close its certificate if it

anticipates that it will be required to re-register with the Department during the current

calendar year.

Example 1: Retailer D had no physical presence in California in calendar years 2018 through

2021. Retailer D’s total combined sales for delivery in California exceeded $500,000 during

calendar year 2018, but not in calendar years 2019, 2020, or 2021. Retailer D registered with

the Department during 2019 and was required to remain registered and collect use tax during

the remainder of the year. Retailer D had the option to voluntarily maintain its Certificate of

Registration-Use Tax with the Department for calendar years 2020 and 2021 or close its

certificate on or after January 1, 2020, and stop collecting use tax after its certificate is

closed.

Example 2: Retailer E had no physical presence in California in calendar years 2018 through

2021. Retailer E’s total combined sales for delivery in California exceeded $500,000 in


Page 10 of 11

calendar 2019, but not in calendar years 2018, 2020, or 2021. Retailer E registered with the

Department during 2019 and was required to remain registered and collect use tax during the

remainder of the year and all of calendar year 2020. Retailer E had the option to voluntarily

maintain its Certification of Registration-Use Tax with the Department for calendar year

2021 or close its certificate on or after January 1, 2021, and stop collecting use tax after its

certificate is closed.

Example 3: Retailer F had a place of business in California and used its own website to make

retail sales of camping equipment. On November 1, 2019, Retailer F closed its place of

business in California, moved to a new place of business in Wyoming, and no longer had any

physical presence in California. However, Retailer F continued to make retail sales for

delivery in California using its own website, but had less than $500,000 in total combined

sales of tangible personal property for delivery in California during 2020 and 2021. Retailer

F was required to remain registered and collect use tax during the remainder of calendar year

2019 and all of calendar year 2020. Retailer F had the option to voluntarily maintain its

Certificate of Registration-Use Tax with the Department for calendar year 2021 or close its

certificate on or after January 1, 2021, and stop collecting use tax after its certificate is

closed.

Example 4: Retailer G had no physical presence in California in calendar years 2018 through

2021. Retailer G’s total combined sales for delivery in California were $450,000 in calendar

year 2018, $600,000 in calendar year 2019, and $490,000 in calendar year 2020, and Retailer

G planned to increase its advertising in California and anticipated that the advertising would

increase its sales for delivery in California. Retailer G registered with the Department during

calendar year 2019 and was required to remain registered and collect use tax during the

remainder of the year and all of calendar year 2020. Retailer G had the option to voluntarily

maintain its Certificate of Registration-Use Tax with the Department for calendar year 2021

or close its Certificate of Registration-Use Tax on or after January 1, 2021, and stop

collecting use tax after its certificate is closed. Retailer G chose to close its Certificate of

Registration – Use Tax on January 1, 2021. However, Retailer G probably should not have

closed its certificate because it anticipated that it would be required to re-register with the

Department due to the total combined sales of tangible personal property for delivery in

California by the retailer and all persons related to the retailer during calendar year 2021.

(f) Use Tax Direct Payment Permit Exemption Certificates. Notwithstanding subdivisions (a) and

(d)(3), a retailer who takes a use tax direct payment exemption certificate in good faith from a

person holding a use tax direct payment permit is relieved from the duty of collecting use tax

from the issuer on the sale for which the certificate is issued. Such certificate must comply with

the requirements of Regulation 1699.6, Use Tax Direct Payment Permits.

(g) Tax as Debt. The use tax required to be collected by the retailer and any amount unreturned

to the customer which is not tax but was collected from the customer under the representation

that it was tax constitute debts owed by the retailer to the state.

(h) Refunds of Excess Collections. Whenever the BoardDepartment ascertains that a retailer has

collected use tax from a customer in excess of the amount required to be collected or has

collected from a customer an amount which was not tax but was represented by the retailer to the


Page 11 of 11

customer as being use tax, no refund of such amount shall be made to the retailer even though

the retailer has paid the amounts so collected to the state. Section 6901 of the Revenue and

Taxation Code requires that any overpayment of use tax be credited or refunded only to the

purchaser who made the overpayment.

(i) Amendments.

(1) Statutes 2011, chapter 313 (Assem. Bill No. 155), section 3 re-enacted section 6203 of the

Revenue and Taxation Code and re-enacted section 6203 became operative on September 15,

2012, in accordance with chapter 313, section 6. The 2012 amendments to this regulation

adopted to implement, interpret, and make specific the provisions of section 6203 of the

Revenue and Taxation Code as re-enacted by Statutes 2011, chapter 313 (Assem. Bill No.

155), section 3, also became operative on September 15, 2012. Any 2012 amendment that

implements, interprets and makes specific a use tax collection obligation that did not exist on

June 27, 2011, shall not have any retroactive effect.

(2) The amendments to this regulation adopted to implement, interpret, and make specific the

provisions of section 6203 of the Revenue and Taxation Code as amended by Statutes 2019,

chapter 5 (Assem. Bill No. 147), section 3 shall be operative April 1, 2019, and any

amendment that implements, interprets and makes specific a use tax collection obligation that

did not exist on March 31, 2019, shall not have any retroactive effect prior to April 1, 2019.

(3) If the amendments to section 6203 made by Statutes 2019, chapter 5, section 3 are held in

a final decision of a court of competent jurisdiction to violate the substantial nexus standard of

the commerce clause of the United States Constitution, then on the date of that final decision,

subdivision (c)(2) and (3) of this regulation shall become operative and subdivision (b)(4) of

this regulation and any provisions of this regulation implementing, interpreting, or making

specific subdivision (b)(4) shall become inoperative, notwithstanding the operative dates set

forth therein.

Note: Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6203,

6204, 6226, and 7051.3, Revenue and Taxation Code; and Section 513(d)(3)(A), Internal

Revenue Code (26 USC).


Page 1 of 3

[Staff Note – Additions to the regulation are in blue with underlined font. Deletions are in red

with strikethrough.]

Regulation 1827. Collection of Use Tax by Retailers.

(a) In General. Except as provided in subdivision (d) below, any retailer engaged in business in a

district imposing transactions (sales) and use taxes and making sales of tangible personal

property, the storage, use or other consumption of which is subject to the state-administered

district use tax imposed by that district is required to register with the boardDepartment, collect

the use tax from the purchaser, give receipts therefor, and pay the tax to the boardDepartment.

Retailers to whom seller's permits have been or are issued under Ssection 6067 of the Revenue

and Taxation Code and who are engaged in business in the district are registered to collect the

district use tax.

Any retailer who is not engaged in business in the district imposing transactions (sales) and use

taxes may voluntarily apply for a Certificate of Registration—Use Tax. Holders of such

certificates are required to collect tax from purchasers, give receipts therefor, and pay tax to the

boardDepartment in the same manner as retailers engaged in business in the district.

(b) When Collection of Use Tax is Required.

(1) Deliveries into the District. A retailer engaged in business in thea district (except retailers

of certain vehicles, aircraft and vessels as described in paragraph (c)(42) below) shall not be

required to collect district use tax from thea purchaser of tangible personal property unless

the retailer ships or delivers the property into thethat district or participates within thethat

district in making the sale of the property, including, but not limited to soliciting or receiving

the order, either directly or indirectly, at a place of business of the retailer in the district or

through any representative, agent, canvasser, solicitor, subsidiary or person in the district

under authority of the retailer.

(2) Presumption of Use - Out-of-District Deliveries. It shall be presumed that tangible

personal property (except for certain vehicles, aircraft and vessels described in paragraph

(c)(42) below) delivered outside a district imposing transactions (sales) and use taxes to a

purchaser known by the retailer to be a resident of a district imposing such taxes was

purchased from a retailer for storage, use or other consumption in the district in which the

purchaser resides and was stored, used or otherwise consumed in that district. If the retailer is

engaged in business in that district and participates within the district in making the sale of

the property, hethe retailer shall collect the district use tax and pay it to the boardDepartment.

The presumption may be rebuttedcontroverted and the retailer relieved of the duty of

collecting the district use tax if the retailer, in good faith, accepts from the purchaser a

statement in writing that the property was purchased for use at a designated point or points

outside a district imposing a use tax. The presumption may also be rebuttedcontroverted by

other evidence satisfactory to the boardDepartment that the property was not purchased for

storage, use or other consumption in a district imposing a use tax.


Page 2 of 3

(3) Vehicles, Aircraft and Undocumented Vessels. Retailers of vehicles, aircraft or

undocumented vessels described in paragraph (c)(42) below are engaged in business in any

district imposing a state-administered transactionsdistrict use tax and are required to collect

the use tax from the purchaser and pay it to the boardDepartment when such vehicles, aircraft

or undocumented vessels are registered or licensed in that district.

(4) Trailing Nexus. A retailer engaged in business in the district is required to collect district

use tax during any calendar year that it has a physical presence in the district that would be

sufficient to establish a substantial nexus with this state for purposes of the Commerce

Clause of the United States Constitution, including, but not limited to, a physical presence

described in Regulation 1684, subdivision (c)(1), or it meets the threshold for total combined

sales of tangible personal property in the district or for delivery in the district set forth in

subdivision (c)(3) of this regulation, and during the following calendar year.

(c) Definition – “Retailer Engaged in Business in District.

(1) The definition of "Rretailer engaged in business in the district" includes any of the

following provisions of Regulation 1684, except that the name of the district shall be

substituted for that of the state:

(A) The definition set forth in Regulation 1684, subdivision (b)(1);

(B) The rebuttable presumption set forth in Regulation 1684, subdivision (b)(2);

(C) The nonexhaustive examples listed in Regulation 1684, subdivision (c);

(D) The exceptions set forth in Regulation 1684, subdivision (d).

(1) Any retailer maintaining, occupying, or using, permanently or temporarily, directly or


distribution, sales or sample room or place, warehouse or storage place or other place of

business in the district.

(2) Any retailer having any representative, agent, salesman, canvasser or solicitor operating

in the district 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.

(3) As respects a lease, any retailer deriving rentals from a lease of tangible personal

property situated in the district.

(42) On and after January 1, 1988, the definition of “retailer engaged in business in the

district” includes any retailer of vehicles subject to registration pursuant to Cchapter 1

(commencing with Ssection 4000) of Ddivision 3 of the Vehicle Code, aircraft licensed in

compliance with Ssection 21411 of the Public Utilities Code, or undocumented vessels

registered under Ddivision 3.5 (commencing with Ssection 9840) of the Vehicle Code.

(3) On and after April 25, 2019, a retailer is engaged in business in a district if the total

combined sales of tangible personal property in California or for delivery in California by


Page 3 of 3

the retailer and all persons related to the retailer exceeds five hundred thousand dollars

($500,000) in the preceding or current calendar year. For purposes of subdivision (c)(3), a

person is related to another person if both persons are related to each other pursuant to

Internal Revenue Code section 267(b) and the regulations thereunder.

(A) If the total combined sales of tangible personal property in California or for delivery

in California by a retailer and all persons related to the retailer exceeded five hundred

thousand dollars ($500,000) during calendar year 2018 or during the period from January

1, 2019, through April 24, 2019, then the retailer was required to begin collecting district

use tax for all districts on April 25, 2019.

(B) If the total combined sales of tangible personal property in California or for delivery

in California by a retailer and all persons related to the retailer exceeded five hundred

thousand dollars ($500,000) during calendar year 2019, but after April 24, 2019, or

during any subsequent calendar year, the retailer is required to begin collecting district

use tax for all districts immediately after the sale was made that exceeded the five

hundred thousand dollar ($500,000) threshold.

(d) Sales to Persons Holding Use Tax Direct Payment Permits. Retailers selling tangible personal

property, the storage, use or other consumption of which is subject to the use tax, who take in

good faith use tax direct payment exemption certificates from persons holding use tax direct

payment permits shall be relieved from the duty of collecting district use tax. Use tax direct

payment permits and exemption certificates must comply with the requirements of Regulation

1699.6. This subdivision applies only to transfers that are subject to state and local use tax.

(e) Tax as Debt. The district use tax required to be collected by the retailer and any amount

unreturned to the customer which is not tax but was collected from the customer under the

representation that it was a tax constitute debts owed by the retailer to the district.

(f) Refunds of Excess Collections. Whenever the Department ascertains that a retailer has

collected district use tax from a customer in excess of the amount required to be collected or has

collected from a customer an amount which was not tax but was represented by the retailer to the

customer as being use tax, no refund of such amount shall be made to the retailer, even though

the retailer has paid the amounts so collected to the state. Section 6901 of the Revenue and

Taxation Code requires that any overpayment of use tax be credited or refunded only to the

purchaser who made the overpayment.

Note: Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7051.3

and 7262, Revenue and Taxation Code.

A A,,c! ••••••~ n U

MuniServices 1400 K Street, Suite 301 Sacramento, CA 95814

June 7, 2019

Ms. Trista Gonzalez, Chief Tax Policy Bureau California Department of Tax and Fee Administration 450 N Street Sacramento, California 95814

Re: Discussion Paper on Regulation 1684, Collection of Use Tax by Retailers, and Regulation 1827, Collection of Use Tax by Retailers

Dear Ms. Gonzalez,

MuniServices is pleased to participate in the regulatory process with respect to clarifying amendments to Regulation 1684, Collection of Use Tax by Retailers, and Regulation 1827, Collection of Use Tax by Retailers.

For over 40 years, MuniServices has partnered with cities, counties, transit districts, and other special districts as their local sales tax consultant. Our local agency clients regularly ask our experts to provide implementation interpretation with respect to legislation and CDTFA regulations. We believe the direction of the draft regulations in the Initial Discussion Paper satisfactorily makes the clarifications.

As noted in our support for AB 147 (Chapter 5, Statutes of 2019) we are pleased that the law clarifies that local district taxes must be collected by any retailer meeting the $500,000 threshold. This clarification will avoid confusion for retailers, the CDTFA, and local governments, and ensures the collection of tens of millions in local revenue. In the last decade, internet sales have grown over 20% on a year-over-year basis. Raising the threshold and as indicated in the Assembly Revenue and Taxation analysis will result in some State and local revenue losses. While relatively minimal now, that number will grow each year with the growth of on-line retail. It is our hope that the CDTFA will monitor and measure these revenues. Such data would be helpful in measuring the actual cost of a higher threshold over time as internet sales continue to grow. AB 147 includes the Marketplace Facilitator Act that will become operative later this year on October 1, 2019. We also look forward to reviewing the proposed draft regulations and continuing our participation in the regulatory process.

Should you have any questions about MuniServices comments, please don’t hesitate to contact me.

Respectfully,

Brenda Narayan Director of Government Relations 916.261.5147 / [email protected]

cc: Janis Varney, MuniServices

www.avenuinsights.com

Staff's Recommended Revisions Regulations 1684 & 1827

Exhibit 3 Page 1of 1

mailto:[email protected]

www.avenuinsights.com

CalTax·· California Taxpayers Association

The California Taxpayers Association is a nonpartisan, nonprofit association formed to support good tax policy, oppose unnecessary taxes and

promote government efficiency. Established in 1926, CalTax is the oldest and largest group representing California taxpayers.

1215 K Street, Suite 1250 • Sacramento, CA 95814 • (916) 441-0490 • www.caltax.org

June 7, 2019

Comments to California Department of Tax and Fee Administration

Interested Parties Meeting on Amendments to Regulations 1684 and

1827, “Collection of Use Tax by Retailers” (Wayfair Implementation)

General Observations:

In May, the California Department of Tax and Fee Administration (CDTFA) released the initial discussion

paper, which contained draft regulatory language proposing changes to Sales and Use Tax Regulation

1684, “Collection of Use Tax by Retailers” and Transactions and Use Tax Regulation 1827, “Collection of Use Tax by Retailers” to implement the new economic nexus provisions and threshold requirements

authorized by AB 147 (Burke) and the U.S. Supreme Court’s decision in South Dakota v. Wayfair. We are

aware that the CDTFA is still working on these issues, and we would like to bring certain questions to

your attention for consideration.

These questions pertain to providing further clarification based on the proposed draft regulatory language

circulated by CDTFA.

Specific Comments:

1. Audits and Appeals Procedures. The draft language in the initial discussion paper for Sales

and Use Tax Regulation 1684 and Transactions and Use Tax Regulation 1827 contains no

references to audit or appeals procedures.

Has the CDTFA considered providing additional guidance on the audit and appeals process to

address issues such as the scope of audits that CDTFA will conduct, whether audits will take

place outside California, and whether there will be any limitations on the use of information

obtained by CDTFA in these audits? Since these regulations will apply to retailers with no

physical presence within the state, guidance on these issues would be valuable.

2. Impact on Foreign Sellers. The draft language appears to suggest that the regulations would

apply even to foreign retailers with no physical presence within the United States.

Has CDTFA considered that these regulations could have a broad impact and potentially capture

foreign sellers with no physical presence in the United States? If this is the intent, will CDTFA be

considering how to limit audit costs and administrative burdens when conducting foreign audits to

enforce these regulations? Furthermore, has CDTFA discussed proposed regulations with the

state’s international trade partners, and considered if this will have negative impacts on foreign trade? Does CDTFA plan to issue further guidance on how these regulations will impact foreign

sellers and how these regulations will be enforced?


Exhibit 4 Page 1 of 2

http://www.caltax.org/

3. Retailers Below the New Threshold. CDTFA originally issued a notice in December stating that

there was a new use tax collection requirement for sales made after April 1, 2019. The

Legislature responded by enacting AB 147 to address California’s implementation of Wayfair. The

bill was signed by the governor on April 25 and applied retroactively to April 1.

Has CDTFA considered providing clarification for retailers who registered as required by CDTFA

notice NR 18-59, but are under the $500,000 sales threshold imposed by AB 147? It is unclear

from the language in the initial discussion paper if these retailers can de-register and stop

collecting use tax after April 25 if they do not meet AB 147’s $500,000 threshold.

4. Exceeding the Threshold. In section b(3)(B) of the Staff Proposed Revisions to Regulation

1684, the example states that a retailer is engaged in business immediately after the sale that

pushed the retailer over the threshold.

Has the CDTFA considered providing additional guidance on when the collection obligation for a

retailer begins? The example provided states that the retailer has $500,400 in sales for the year

after making a $900 transaction, and now must collect use tax from customers. Does this mean

the retailer is obligated to collect use tax only on sales that occur after the $900 transaction? If

the retailer must collect use tax for the transaction that pushed it over the limit, does it collect use

tax on the portion above the threshold or on the whole transaction?

5. Trailing Nexus. The initial discussion paper states that retailers are required to be registered with

the CDTFA if they had substantial nexus during the preceding calendar year. Furthermore,

CDTFA suggests that retailers should remain registered and not close their certificates if they

anticipate that they will be required to re-register during the current calendar year.

Has the CDTFA considered how difficult it would be for retailers to estimate with certainty their

projected sales into the state for a given calendar year? Will CDTFA impose penalties for

taxpayers who chose not to voluntarily remain registered because they did not believe their sales

would exceed the threshold? Furthermore, has CDTFA considered providing some type of

incentive or protection for retailers who do not have an obligation to register and collect use tax to

voluntarily register and remit taxes to CDTFA?

6. Implementation of Marketplace Facilitator Regulations. Since marketplace facilitator

regulations will be complicated, it would be highly beneficial for stakeholders and CDTFA to have

a fair, transparent, and open discussion regarding implementation. Marketplace facilitator

regulations should not be applied retroactively, should avoid double taxation on consumers and

retailers, and should provide clarity for taxpayers to make it easier for them to comply.

Stakeholders should receive adequate time to provide comments and feedback to CDTFA to

ensure that marketplace facilitator regulations are crafted thoughtfully. Is CDTFA planning on

revising marketplace facilitator language if it finds that the regulations are overly broad and

capture more entities than originally intended?

With the increased risk that marketplaces may face in complying with new regulations, has

CDTFA considered providing some type of protection for marketplace facilitators? Other states

have provided marketplace facilitators with audit or class-action protection if they comply with

regulatory requirements.


Exhibit 4 Page 2 of 2

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