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Effective January 1, 2004, California state departments and agencies may contract only with vendors, contractors, or affiliates of vendors or contractors who are registered for sales and use tax purposes with the State of California. When offering a contract to a vendor, contractor, or affiliate, California state departments or agencies are required to collect from that vendor, contractor, or affiliate the appropriate certificate or proof of registration. Exemptions to this provision apply in the case where the contract qualifies as “necessary to meet a compelling state interest.” (Sec. 10295.1, California Codes, effective as noted above.)


Multiple states have recently passed or introduced legislation setting guidelines on who is allowed to make contracts with state agencies. States have previously made it clear that their agencies are not allowed to do business with vendors who are not registered to collect and remit sales and use tax in their state. A new trend is emerging in which states are not allowing vendors to do business with their agencies if an affiliate of the vendor is supposed to, but has not registered to collect and remit sales and use tax in their state. Legislation is pending in Georgia and legislation has been passed in California, Connecticut, Illinois, Missouri, North Carolina, and Virginia. (Georgia- HB 1240, 2004; California- SB 1009, 2003; Connecticut- HB 6802, 2003; Illinois- SB 874, 2003; Missouri- HB 600, 2003; North Carolina- HB 1433, 1999; Virginia- Ruling of Commissioner, P.D. 04-4, January 23, 2004.)


This policy is effective as of January 1, 2004. Any vendor that is offered a contract by California must submit a copy of their seller's permit or certificate of registration. In addition, the vendor must submit the same documentation for any affiliates that make sales into California. The one exception to this policy is that executive directors of the various state departments and agencies can determine that the contract is necessary to meet a 'compelling state interest.' (California Law Sec. 10295.1.)


In California, the distribution of coupons can be considered a selling activity under state law. The California State Board of Equalization determined an out-of-state online retailer was responsible for use tax on sales to all California customers because of their affiliation with an in-state store. Customers purchasing items at these particular in-state stores were given a promotional shopping bag with both the affiliate's and the online retailer's logos on them. Inside were coupon books that could only be redeemed at the online retailer's business. The online retailer also paid for all printing costs and the insertion of the coupons into the shopping bags. The online retailer argued that solicitation was not a selling activity but the SBE considered the situation a joint marketing activity in which a customer base was being targeted. They also stated the efforts the in-state representatives made were an integral part in assisting the out-of-state sales for the online retailer. (Barnes&, California State Board of Equalization, Mem. Opin. SC OHB 97-732835, September 12, 2002)



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