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California has issued a supplemental special notice informing taxpayers that fixed price contracts and lease agreements are not exempt from the 1% increase. This is true even if they were entered into before the April 1, 2009 effective date. So, if you incorrectly collected sales or use tax based on a lower rate, you will still owe the additional 1% tax. However, fixed price contracts and lease agreements entered into prior to the starting date of a new district tax are exempt from the district tax increase. (Supplement to Special Notices: New Tax rates to Take Effect April 1, 2009, and Sales and Use Tax Rate Increases on April 1, 2009 California State Board of Equalization, April 2009)


The California Court of Appeals has upheld a trial courts decision that a taxpayer’s unfair competition and misleading advertisement claims against a telecommunication provider be dismissed. In compliance with the California Code of Regulation, providers selling cell phones at half-price as an incentive to enter into a calling plan package are required to charge sales tax on the full retail value of the phone, which may be passed onto the customer. The provider passed this tax amount on to the taxpayer without informing him prior to the sale that the tax was based off of the retail price, even though the amount was stated on the sales invoice and the taxpayer could have refused to enter into the contract for the stated price. Since the applicable Regulation is silent on the provider’s duty to state the amount of sales tax prior to sale, it provides a safe harbor that permits this conduct and may not be challenged with general unfair competition laws. (Yabsley v. Cingular Wireless, LLC, California Court of Appeals, Second Appellate District, Division Six, 2d Civil No. B198827, August 18, 2008)


In an effort to resolve the state budget deficit, California will be imposing a 1% temporary increase (from 6.25% to 7.25%) in the state sales and use tax rate, effective April 1, 2009. The 1% increase (specifically dedicated to the General Fund portion of the state rate) will remain in effect until July 1, 2011, unless an amendment to the California Constitution is approved. If an amendment is approved the increase would then expire July 1, 2012. (Ch. 18 (A.B. 3), Laws 2009, Third Extraordinary Session, effective February 20, 2009, and operative as noted)


A.B. 27 and A.B.178 have been introduced to include in the definition of a “retailer engaged in business in this state” any retailer entering into an agreement with a resident of California under which the resident, for a commission or other consideration, directly or indirectly refers potential customers of tangible personal property, whether by a link or Internet Web site or otherwise, to the retailer, if the cumulative gross receipts from sales to customers referred pursuant to these agreements is in excess of ten thousand dollars during the preceding four calendar quarters. If the retailer can demonstrate that during the four quarters in question, the resident did not engage in referrals in California on behalf of the retailer that would satisfy the requirements of the United States Constitution commerce clause, the proposed new definition is inapplicable to the retailer.

Additionally, A.B. 27 also seeks to include in the definition any retailer who has any representative, agent, salesperson, canvasser, independent contractor, or solicitor servicing or repairing tangible personal property in California under the authority of the retailer. (A.B. 27 as introduced in the third extraordinary session by the California Assembly on January 29, 2009, and A.B. 178, as introduced in the regular session by the California Assembly on February 2, 2009)


California Regulations 1591 and 1602 have been amended to clarify that dietary supplements, when supplied by a physician as part of a weight loss program to treat the disease obesity, are not classified as food products and, therefore, exempt from sales and use taxes. These meal replacements fall into the category of medicine because they are intended for internal use by human beings in the treatment of the disease obesity. (Regs. 1591 and 1602, California State Board of Equalization, effective December 14, 2008)



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