BACKGROUND

Businesses, including those run by direct salespeople, are required to register for many different types of licenses and permits issued by state and local governments.  DSA would like to inform you of one that California distributors may not know exists.

In 2009, California Assembly Bill x4-18 added section 6225 to the Revenue and Taxation Code, which requires a "qualified purchaser" to register with the Board of Equalization (BOE) and report and pay use tax directly to the BOE.  Under this section, a "qualified purchaser" includes businesses with at least $100,000 in annual gross receipts from business operations.

A "qualified purchaser" means a person that meets all of the following conditions:

• The person receives at least $100,000 in gross receipts from business operations per calendar year. Note: Gross receipts is the total of all receipts from both in-state and out-of-state business operations.

• The person is not required to hold a seller's permit or certificate of registration for use tax (under section 6226 of the Revenue and Taxation Code).

• The person is not a holder of a use tax direct payment permit as described in section 7051.3 of the Revenue and Taxation Code.

• The person is not otherwise registered with the BOE to report use tax.

IMPACT ON CALIFORNIA DIRECT SALESPEOPLE

The vast majority of California direct salespeople are unaffected by this law, since their annual gross receipts fall under $100,000.  However, some larger distributors will need to register with the Board of Equalization.

The fact that many direct selling companies have sales collection agreements with the state of California is immaterial regarding the application of the registration requirements contained in the law.  Purchases made by California direct salespeople from out-of-state businesses selling products such as cars, office supplies, etc. are subject to California’s use tax and obviously would not be covered by a direct selling company’s sales tax collection agreement with California.

A recent article has referred to the registration requirement as a “Mary Kay Tax.”  Direct salespeople are not disproportionately affected by the reporting requirements than any other type of business.  The author of the article was merely trying to stress the burden the registration places on very small businesses.

The California Board of Equalization has issued a notice on the reporting requirements, which explains who must register, the process for doing so, and what purchases are covered by the reporting requirements.

If legislation is introduced to repeal this unpopular law, DSA will alert you.  Additionally, DSA will continue to provide you updates on other legislative and regulatory tax matters that could impact direct selling companies and distributors.