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The Los Angeles Office of Finance has provided information on the voluntary disclosure program that began on October 4, 2011. The program is offered to qualified taxpayers who have not registered or paid the Los Angeles business tax. To qualify for the program, a business must be engaged in business in Los Angeles; not have previously applied for a business tax registration certificate, have been registered with the Office of Finance, or filed a business tax renewal form; not have previously been contacted by the Office regarding Los Angeles business tax liabilities or be under audit for said liability; voluntarily apply for the program, prior to any unilateral contact with the Office and file an application for a voluntary disclosure agreement (VDA) and a full and accurate statement of activities within Los Angeles for the eight preceding annual tax periods; fully cooperate with an investigation of the taxes at issue in the VDA, including providing all books and records to the Office, and not have failed to register and pay the business tax as a result of fraud or intent to evade the Los Angeles Municipal Code. Effective October 4, 2011 through October 3, 2012, the look-back period for making an assessment of prior business taxes is limited to three years for qualifying businesses. Beginning October 4, 2012, the period is then limited to five years. Penalties on late payment of taxes may be waived for qualifying businesses. Applicants can also obtain a written opinion on whether or not the Office would be inclined to approve a voluntary disclosure request based on information presented anonymously. Applications for the program must be submitted to the Office. The application form and instructions are available on the Office’s website. If applicants wish to remain anonymous, they may have a representative contact the Office. Any business entering into a VDA must fully disclose all material facts pertaining to its tax liability. Once the agreement is signed, the business has 30 days to file annual tax renewal forms and pay all taxes and interest. The business must also agree to continue filing annual tax renewal forms and pay any business tax due in the future. The VDA will be null and void if the business misrepresents material facts provided regarding the agreement, doesn’t file annual renewal forms or pay business tax for the periods covered in the agreement, or defaults on an installment payment plan for the taxes covered in the agreement. Questions regarding the program can be directed to Ms. Teresita Diaz at (Voluntary Disclosure Program - Unregistered Businesses, City of Los Angeles Office of Finance, October 2011)


California has enacted click-through and affiliate nexus legislation that expands the definition of a retailer engaged in business in California, effective as of June 29, 2011. The definition now includes any retailer who enters into an agreement with a person in California in which the person directly or indirectly refers potential purchasers of tangible personal property to the retailer for a commission or other consideration, whether through an internet link, website, or otherwise. Two conditions must be met for the definition to apply. First, the cumulative sales price from all of the retailer’s sales of tangible personal property in the preceding 12 months to California purchasers referred pursuant to such an agreement must exceed $10,000. Second, the retailer’s total cumulative sales of tangible personal property to California purchasers must exceed $500,000 in the preceding 12 months. Under the provision, an “agreement” does not include any agreement in which a retailer purchases advertisements from a person in California, whether on television, radio, print, internet, or by any other medium, unless the ad revenue paid consists of commissions or other consideration based on sales of tangible personal property. In addition, “agreement” does not include any agreement in which a retailer engages a person in California to place an advertisement on a website operated by that person (or another person in the state), unless the person also directly or indirectly solicits potential customers in California through flyers, newsletters, phone calls, e-mail, blogs, micro blogs, social networking sites, or other means of direct and indirect solicitation targeted specifically at potential California customers. The click-through nexus provisions do not apply if the retailer can demonstrate that the person in California with whom the retailer has an agreement did not engage in referrals that would satisfy the Commerce Clause requirements of the U.S. Constitution. In addition to the click through nexus provisions, this bill includes in the definition of “retailer” an entity affiliated with a retailer under federal income tax law within the meaning of IRC §1504. The term “retailer engaged in business in this state” includes any retailer that is a member of a commonly controlled group and a combined reporting group that includes another member of the group that performs services in California in connection with tangible personal property to be sold by the retailer. This includes but is not limited to the design and development of said tangible personal property and the solicitation of sales of tangible personal property on behalf of the retailer. The California State Board of Equalization (BOE) instructs businesses meeting the requirements above and who are not already registered to fill out and submit and application for a California Certificate of Registration - Use Tax. The BOE has announced that the new law does not require retailers to collect district use taxes unless they are engaged in business in the taxing districts. For an update on the status of A.B. 28, click here (Ch. 7 (A.B. 28), Laws 2011 (First Extraordinary Session), effective June 29, 2011; News Release 81-11-G, Special Notice L-284, and BOE Publication 77 Out-of-State Sellers: Do you Need To Register With California?, California State Board of Equalization, July 1, 2011, July 2011, and June 2011; News Releases 84-11-H, 85-11-H, California State Board of Equalization, July 25 and 26, 2011)


California’s statewide sales and use tax rate applicable to sales of tangible personal property is scheduled to decrease on July 1, 2011. The current rate – 8.25% - will be reduced to 7.25%. This rate is a combination of 6.25% state tax and a 1% state wide county tax resulting in the 7.25% rate. Effective July 1, 2011, the sales and use tax rate imposed on diesel fuel sales will increase 1.87%, making the new combined rate for diesel fuel 9.12% plus applicable district taxes. (Special Notice L-276, California State Board of Equalization, June 2011)


Software licensed by a California taxpayer to a telephone company to operate switching equipment was deemed exempt from sales and use tax under statutes regarding technology transfer agreements (TTAs). The software was copyrighted, contained patented processes, and allowed the telephone company to copy the software and sell products that embody the patents and copyright. The taxpayer licensed the equipment to the telephone company, giving them the right to produce telephonic communications without infringing on the taxpayer’s patents. The Court of Appeal of California stated that the TTA statutes apply when patents or copyrights are transferred and that licensing agreements are exempt from sales and use tax if they qualify as TTAs. The licenses allowed the telephone company to reproduce the copyrighted material on its computers. As a result, the prewritten software qualified as a nontaxable TTA. The California State Board of Equalization (BOE) attempted to limit the scope of the TTA statute by excluding prewritten computer programs. This was determined to be an invalid exercise of its regulatory power. The TTA statutes apply to any agreement involving the sale or license of copyrighted materials or patented processes. They do not restrict agreements that transfer an interest in prewritten software. The BOE has announced that it will amend a regulation to make it consistent with the Court’s decision. The amendment clarifies that when the holder of a copyright or patent sells that intellectual property to another company in a TTA that includes the transfer of software, the amount charged for copyrights or patents is exempt from sales tax. Taxpayers that have licensed software in California should evaluate whether the software agreements qualify as TTAs and if tax was paid apply for a refund of the sales or use tax. The California State Board of Equalization has subsequently amended a regulation (Reg. 1507) to make it consistent with the court’s holding in this case. (Nortel Networks, Inc. v. State Board of Equalization, Court of Appeal of California, Second District, No. B213415, January 18, 2011; News Release 66-11-H, California State Board of Equalization, May 27, 2011; Reg. 1507, California State Board of Equalization, effective June 22, 2011)


If enacted, recently passed California legislation would require retailers, who are not required to collect use tax, to provide notification on their retail Internet Web site or catalogue that tax is imposed on the storage, use, or other consumption in California of tangible personal property purchased from the retailer that is not exempt, and is required to be paid by the purchaser. Amendments to the bill over the last few months have eliminated but then returned the rebuttable presumption that any retailer that is part of a controlled group of corporations, and that controlled group of corporations has a component member that is a retailer engaged in business in California, is presumed to be a retailer engaged in business in the State. The original bill included a provision that requires every person who is not registered with the California Board of Equalization (BOE), who sells tangible personal property, the storage, use, or other consumption of which is subject to use tax, to file a use tax report with the BOE. However, at this time, this provision has been eliminated. If passed, this bill would be effective January 1, 2011. (A.B. 2078, passed by the California Assembly on May 6, 2010, Amended June 16, 2010 and June 24, 2010). (08/10)



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