This is a third in a series about the exemption from California taxation of income from a non California based income from sale of tangible personal property to California customers. See http://www.multistatebztax.com/?p=576 and http://www.multistatebztax.com/?p=580. Today we talk about what California activities of your sales rep that will take you out of the protection of federal Public Law 86-272.
By way of background, the federal law only protects sale of tangible personal property by a non California based business where the order is accepted out of state and the goods are shipped into California from an out of state location. Furthermore, the only California presence permitted is solicitation activities of sales reps. In other words, no other California employees or property; other than certain samples, cars and other home office equipment used by the sales reps in the course of its solicitation of sales activities.
We talked in the last blog about Franchise Tax Board Publication 1050 (http://www.ftb.ca.gov/forms/misc/1050.pdf) which described in some detail the permissible California sales rep activities under the federal law. That publication also contains California sales rep activities that takes the non California based business out of the protection of the federal law.
Here is the list of “unprotected activities” taken right out of Publication 1050:
“A. Unprotected Activities:
The following in-state activities … (unless when taken together, these prohibited activities establish only a trivial connection with California) … are not considered as either solicitation of orders or ancillary thereto or otherwise protected under P.L. 86-272 and will cause otherwise protected sales to lose their protection under P.L. 86-272:
1. Making repairs or providing maintenance or service to the property sold or to be sold.
2. Collecting current or delinquent accounts, whether directly or by third parties, through assignment or otherwise.
3. Investigating credit worthiness.
4. Installation or supervision of installation at or after shipment or delivery.
5. Conducting training courses, seminars or lectures for personnel other than personnel involved only in solicitation.
6. Providing any kind of technical assistance or service including, but not limited to, engineering assistance or design service, when one of the purposes thereof is other than the facilitation of the solicitation of orders.
7. Investigating, handling, or otherwise assisting in resolving customer complaints, other than mediating direct customer complaints when the sole purpose of such mediation is to ingratiate the sales personnel with the customer.
8. Approving or accepting orders.
9. Repossessing property.
10. Securing deposits on sales.
11. Picking up or replacing damaged or returned property.
12. Hiring, training, or supervising personnel, other than personnel involved only in solicitation.
13. Using agency stock checks or any other instrument or process by which sales are made within this state by sales personnel.
14. Maintaining a sample or display room in excess of two weeks (14 days) at any one location within the state during the tax year.
15. Carrying samples for sale, exchange or distribution in any manner for consideration or other value.
16. Owning, leasing, using or maintaining any of the following facilities or property in-state:
a. Repair shop.
b. Parts department.
c. Any kind of office other than an in-home office as described as permitted under IV.A.18 and IV.B.2 … (of Franchise Tax Board Publication 1050).
d. Warehouse.
e. Meeting place for directors, officers, or employees.
f. Stock of goods other than samples for sales personnel or that are used entirely ancillary to solicitation.
g. Telephone answering service that is publicly attributed to the company or to employees or agents of the company in their representative status.
h. Mobile stores, vehicles with drivers who are sales personnel making sales from the vehicles.
i. Real property or fixtures to real property of any kind.
17. Consigning stock of goods or other tangible personal property to any person, including an independent contractor, for sale.
18. Maintaining, by any employee or other representative, an office or place of business of any kind …; other than an in-home office located within the residence of the employee or representative that (i) is not publicly attributed to the company or to the employee or representative of the company in an employee or representative capacity, and (ii) so long as the use of such office is limited to soliciting and receiving orders from customers; for transmitting such orders outside the state for acceptance or rejection by the company; or for such other activities that are protected under P.L. 86-272 or under paragraph IV.B. … (of Franchise Tax Board Publication 1050).
A telephone listing or other public listing within the state for the company or for an employee or representative of the company in such capacity or other indications through advertising or business literature that the company or its employee or representative can be contacted at a specific address within the state shall normally be determined as the company maintaining within this state an office or place of business attributable to the company or to its employee or representative in a representative capacity. However, the normal distribution and use of business cards and stationery identifying the employee’s or representative’s name, address, telephone, fax numbers and affiliation with the company shall not, by itself, be considered as advertising or otherwise publicly attributing an office to the company or its employee or representative.
The maintenance of any office or other place of business in this state that does not strictly qualify as an “in-home” office as described above shall, by itself, cause the loss of protection under … (Public Law 86-272)
(I)t is not relevant whether the company pays directly, indirectly, or not at all for the cost of maintaining such in-home office.
19. Entering into franchising or licensing agreements; selling or otherwise disposing of franchises and licenses; or selling or otherwise transferring tangible personal property pursuant to such franchise or license by the franchisor or licensor to its franchisee or licensee within the state.
20. Conducting activity not listed in paragraph IV.B. … (of Franchise Tax Board Publication 1050) … which was discussed in the previous blog) … which is not entirely ancillary to requests for orders, even if such activity helps to increase purchases.”
By John McCauley: Mr. McCauley is a lawyer based in southern California who provides legal counsel to companies; and assists them with California income and franchise tax issues.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291