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socrateaser
socrateaser, Attorney
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Experience:  Retired (mostly)
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Legalities about using a California Sellers Permit and Inter-state

Resolved Question:

Legalities about using a California Sellers Permit and Inter-state sales.

Here is some background info:
Corporate A: Hereanafter referred to as "ACorp" is a California corporate with a retail/wholesale location in California, but is completely wholesale at this time.

Corporate B: Hereinafter referred to as "BCorp" is a Delaware corporation with a retail (virtual) location in Delaware.

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1. ACorp is involved in purchasing merchandise from various suppliers and selling them to BCorp.

2. ACorp is not currently involved in any retail sales in california

3. ACorp fulfils orders (via internet) for BCorp, in other words ships the merchandise to BCorps customers directly across the world, from California and bills BCorp for the merchandise and fulfilment service.

4. BCorp is in Delaware, therefore BCorp is not required to charge sales tax in Delaware (as per the state laws).

5. I am planning on getting a sellers permit for ACorp so I can avoid paying taxes to its suppliers by being able to issue them resale certs. BCorp only has one supplier, which is ACorp.

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Here are the Questions:

1. Considering we are not selling any merchandise (retail) in California, and are selling them to BCorp (in Delaware), but also shipping them to BCorps customers (which may reside in California), would there be any tax required to pay to California on those sales?

2. Would BCorp need to pay any interstate sales tax to California if it sells merchandise to california customers?

3. ACorp has been operating since 2005, and is now considering obtaining a CA sellers permit. Would there be any liability or penalties which may be charged by the Ca BOE for not obtaining a permit sooner?
Submitted: 9 months ago.
Category: Business Law
Expert:  socrateaser replied 9 months ago.

Hello...you asked:



1. Considering we are not selling any merchandise (retail) in California, and are selling them to BCorp (in Delaware), but also shipping them to BCorp customers (which may reside in California), would there be any tax required to pay to California on those sales?

A: No. See Title 18 C.C.R. 1620(a)(3)(B).

2. Would BCorp need to pay any interstate sales tax to California if it sells merchandise to California customers?

A: If the order originates from ACorp, or there is some sort of behind-the-scene joint venture whereby BCorp is filling orders for ACorp,, then yes. Otherwise no. See Title 18 C.C.R. 1620(a)(2)(A)-(B).

3. ACorp has been operating since 2005, and is now considering obtaining a CA sellers permit. Would there be any liability or penalties which may be charged by the Ca BOE for not obtaining a permit sooner?

A: If ACorp has been making sales without paying sales tax according to the rules described in #1-2 above, then ACorp could have a huge liability for uncollected sales tax, assuming that it is liable for sales tax on its prior sales.

Please let me know if my answer is helpful. And, thanks for using justanswer.com!

Customer: replied 9 months ago.

Thanks, XXXXX XXXXX some clarification....


 


2A: If the order originates from ACorp, or there is some sort of behind-the-scene joint venture whereby BCorp is filling orders for ACorp,, then yes. Otherwise no. See Title 18 C.C.R. 1620(a)(2)(A)-(B).


 


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BCorp is a website, that is inc. in Delaware, it is a virtual office (no onsite employees), and the owner is the same as the owner of ACorp. Therefore, all orders get placed by customers over the web, aka to BCorp, and then fulfilled and shipped by ACorp. So I assume there would be no tax liability here correct?


 


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3A: If ACorp has been making sales without paying sales tax according to the rules described in #1-2 above, then ACorp could have a huge liability for uncollected sales tax, assuming that it is liable for sales tax on its prior sales.


 


-------------


 


ACorp has been operating in this same manner since 2005, therefore, if #1-#2 does not require me to pay tax, then there should be no liability correct?


 

Expert:  socrateaser replied 9 months ago.
BCorp is a website, that is inc. in Delaware, it is a virtual office (no onsite employees), and the owner is the same as the owner of ACorp. Therefore, all orders get placed by customers over the web, aka to BCorp, and then fulfilled and shipped by ACorp. So I assume there would be no tax liability here correct?

 

A: I wouldn't assume that you are liability free. If the BOE thinks that the substance of these transactions is to avoid California sales tax, and that the nerve center of the operation is actually in California, then BOE will declare the business model an unlawful tax shelter, and attempt to collect sales tax from you.

I'm not in a position to make this determination. BOE is extremely adversarial when it comes to sales tax, so I would expect that you would be challenged if you are audited. After that, it's up to the courts to decide which side of the line your business model is operating on.

 

ACorp has been operating in this same manner since 2005, therefore, if #1-#2 does not require me to pay tax, then there should be no liability correct?

 

A: Assuming your premise is correct, then you would have no tax liability. However, were I in your shoes, I would close ACorp and BCorp, and create two new entities with no prior history. That would, at least, reduce your liability of an audit of ACorp for prior year liabilities. Closing BCorp would also eliminate its prior history, so that an audit of BCorp would not lead an auditor back to the dissolved ACorp, and cause the BOE to attempt to collect from you personally.

 

Hope this helps.

 

Customer: replied 9 months ago.

Even though this structure may have it's tax benefits, it was not set-up in order to be a tax shelter. It was done for liability and to provide anonymity, and a layer/separation of business operations, and to potentially grow the companies in different sectors without having them combined.

 

I mean, there's a few more minor reasons that can be used for defense, but I guess what I'm trying to ask is if there are any guidelines which the BOE has to determine what scenarios would be considered as tax shelter or something that helps define what is/is not a tax shelter?

 

 

Dissolving/Re-Opening these corps would be quite a task, I would like to avoid this, but if there are possibilities of this operation being unlawful, then it may be a good idea. Unless I re-open them with the same names, not sure if this would cause a problem.. Would it?

Expert:  socrateaser replied 9 months ago.
Section 1620(a)(2)(A) provides the rule, and it's pretty self explanatory as to what you can and cannot do:

  • Sales tax applies when the order for the property is sent by the purchaser to, or delivery of the property is made by, any local branch, office, outlet or other place of business of the retailer in this state, or agent or representative operating out of or having any connection with, such local branch, office, outlet or other place of business and the sale occurs in this state. The term "other place of business" as used herein includes the homes of district managers, service representatives, and other resident employees, who perform substantial services in relation to the retailer's functions in the state. It is immaterial that the contract of sale requires or contemplates that the goods will be shipped to the purchaser from a point outside the state. Participation in the transaction in any way by the local office, branch, outlet or other place of business is sufficient to sustain the tax.

 

As can be observed from the regulatory language, the issue here is whether you are acting as an "agent" of ACorp when effecting orders for BCorp. We are at the point where I would have to start explaining an entirely different legal concept: the Law of Agency, and that's a complicated subject.

 

If you would like to discuss this further wit me, please provide a positive rating for my answer to your original questions in this Q&A session, open a new Q&A session, put my userid ("To socrateaser, only"), and the system will send me an alert.

 

Thanks in advance for your continued confidence.

 

 

Customer: replied 9 months ago.

What do I put in the new question?


 


I would like advice on how to avoid being classified as an 'agent' or a tax shelter... considering you know the situation already.

Expert:  socrateaser replied 9 months ago.
Then ask that question.

Thanks again!
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 33920
Experience: Retired (mostly)
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