Another recent development in the area of out of state retailers collecting California use tax has evolved with the case of Current, Inc. vs State Board of Equalization (California Court of Appeals). In this Case, the State Board of Equalization attempted to hold Current liable for the collection of California use tax even though they had no physical presence in California. This was based on Revenue & Taxation Code Section 6203 (g) which defined retailers engaged in business in this state (thus liable to collect use tax) as “any retailer owned or controlled by the same interests which own or control any retailer engaged in business in the same or a similar line of business in this state.”
By way of background, Current, a printer and distributor of greeting Cards was located out of state. On 12/31/87 they were acquired by Deluxe Corporation. Since Deluxe had locations in California, the state attempted to hold Current liable under the aforementioned Revenue & Taxation Code Section. The court of appeals ruled that this section of the law in effect is unconstitutional because it violates the commerce clause and ignores the general principle of corporations. This principle says that each corporation is a separate and legal entity and you can not impute the tax status of one corporation to the other. In other words, they did not see any relevance in the fact that Current was acquired by Deluxe. If there is any California nexus issues, it has to rest with Current notwithstanding the nexus established by the parent corporation.
Another point of disagreement in the court case has to do with how the state was trying to define a similar line of business. The state took the position that both companies, Deluxe and Current, were engaged in the business of printing and therefore in similar lines of business. The court pointed out, however, the type of product being printed by Current, (i.e. greeting cards) made up the majority of Current’s business. Deluxe, on the other hand, was exclusively a check printer. The courts ruled that this didn’t constitute similar lines of business as stated in 6203(g). The common denominator of printers was too broad of a similarity and a distinction should be made between the type of product being printed. In summary, the court ruled that not only is this section of the law unconstitutional but even if that were not the case, the state’s interpretation of similar lines of business must be more narrowly construed. Subsequently, section 6203 (g) was deleted.
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This was the second blow to Revenue & Taxation Code Section 6203 requiring out of state retailers to collect California taxes. As you may recall, the Quill case in effect made 6203 (f) non operational. Unless there is an enactment of a congressional act authorizing states to compel the collection of state sales and use tax by out of state retailers.
