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Effective January 1, 2007, certain leased original works of art are exempt from California sales and use tax. Specifically, the exemption applies to works of art that are leased from one nonprofit organization to another nonprofit organization for a period of 35 years or more. The definition of “original work of art” was expanded to include costumes, dress, clothing and personal adornment. (Special Notice L-160, California State Board of Equalization, December 2006)


In California, any previous owner of tangible personal property who distributes property sold by an out-of-state retailer to a California customer is deemed a retailer of that property and is responsible for collection of tax on that property. This position was highlighted in a recent court case involving a Wisconsin wholesaler which sold shoes to its out-of-state subsidiaries for resale, but retained possession of the shoes in its warehouse until their ultimate drop shipment to the subsidiaries’ California customers. As a result, the wholesaler of the property delivering the property within the State of California was responsible for the collection of California use tax. The State further ruled that the finding did not place an unconstitutional burden on interstate commerce because California wholesalers who use out-of-state retailers to drop ship their products to California customers have the same collection responsibility. (Mason Shoe Manufacturing Co. v. California State Board of Equalization, California Court of Appeal, No. A104964)


The California State Board of Equalization extended the deadline on its amnesty program until January 1, 2008. The extension applies to the remittance of unreported use taxes by retailers. The general Sales and Use Tax Law offers an 8-year statute of limitations for collections of use taxes that are not reported under that law. The amnesty program limits this look back period to three years. The collection of outstanding use taxes is used to provide quality education to California’s children, affordable health care to state residents, and planning of the state’s future. (California State Board of Equalization, AB 671, August 30, 2005)


In a recent decision by the California District Court of Appeals, the court ruled that “brick and mortar” stores in the State of California were acting as agents for an online retailer giving the online retailer nexus in the state. The court found that the “brick and mortar” counterpart to the online retailer would accept returns and provide refunds, store credits or exchanges for goods sold from the online retailer, but would not offer the same services for goods from other online retailers. The internet store was selling and shipping goods to in-state customers. The cash register receipts in the “brick and mortar” store would also direct customers to the online retailer. The two entities also used similar logos and employees of the “brick and mortar” store were instructed to refer people to the online retailer. These facts supported the conclusion that the online retailer indeed did have nexus in the state and was responsible for registering in the state and collecting sales and use tax. (Borders Online, LLC v. State Board of Equalization, California Court of Appeals)


The State of California recently authorized an amnesty program effective from February 1, 2005 through March 31, 2005. The program applies to personal income, corporation, franchise (income), and sales and use taxes for reporting periods beginning before January 1, 2003. The Board of Equalization is authorized to waive penalties, but not interest. In order to be eligible for the amnesty, taxpayers must have not filed California tax returns or underreported income on tax returns they did file, claimed excessive deductions, or paid their taxes late.

Taxpayers already under investigation for tax issues and taxpayers who could have participated in California’s Voluntary Compliance Initiative or the 2003 IRS Offshore Voluntary Compliance Initiative are not eligible. To participate, taxpayers must submit completed and signed amnesty applications by March 31, 2005, and amended or missing tax returns and payment of liabilities and interest must be remitted by May 31, 2005. An installment payment agreement plan will also be available, with all payments due by June 30, 2006. The amnesty application and tax forms for 1994 through 2003 are currently available online. If taxpayers do not participate in the amnesty program but owe sales or use tax for reporting periods beginning before January 1, 2003, the Board will assess a penalty equal to 50% of the interest on the unpaid tax amount as of March 31, 2005. If the Board issues a notice of determination on or after April 1, 2005, the penalties included in that determination will be doubled, excluding the previously described penalty. The amnesty program has also increased the statute of limitations for the open periods to ten years. The state Voluntary Disclosure Program remains in force, its terms include a three year look-back period and potential waiver of penalty if conditions have been satisfied, but the additional 50% interest on post-2003 liability would still apply.

It is our recommendation that if you have any potential issues in the periods related to the amnesty program, that you participate in the amnesty program as the penalties and statute of limitations imposed by the State of California are severe and can impact your company significantly.

If you have any questions or would like any assistance in applying for the program, please contact Diane Yetter of Yetter Consulting Services, Inc. at 312-701-1800 or via email at or Barbara Timek of Yetter Consulting Services, Inc. at 973-347-0107 or via email at



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