The newly amended section 6203 of the California Revenue and Tax Code provides that a retailer engaged in business in the State includes any retailer that:
- has substantial nexus with the State within the meaning of the Commerce Clause;
- is a member of a commonly controlled group of corporations that includes another member which performs services for the out-of-state retailer in California (including the design and development of TPP sold by the out-of-state retailer or the solicitation of sales on behalf of the out-of-state retailer); or
- enters into an agreement under which a person in California refers potential customers to the out-of-state retailer via the internet or other means in exchange for a commission or other consideration.
However, unlike other states, California’s click-through law actually applies to affiliate referrals regardless of the channel through which the out-of-state retailer receives its referrals. While states like Illinois only include internet referrals in their nexus statute, California’s statute covers referrals from internet, television, radio, print, and other media in making the determination as to whether an out-of-state retailer is engaged in business in the State.
Also, unlike other state statutes, California’s new law states that, in the case of click-through, web-based affiliates, the in-state affiliate will only create nexus for the out-of-state retailer if, in addition to placing a link on its website, the affiliate also directly or indirectly solicits sales on behalf of the retailer through in-person, print, or electronic solicitation specifically targeted to potential California customers.
Finally, unlike other click-through states (with the exception of Illinois and Connecticut), the California statute does not specifically refer to any presumption of nexus which may be rebutted by the out-of-state retailer. However, the statute does make it clear that the affiliate nexus provisions will not apply if the out-of-state retailer can show that its affiliates made no referrals in the State sufficient to satisfy the Commerce Clause.
Keeping in mind the statute has already gone into effect, retailers should make sure to consult with their tax advisors soon. With that said though, we also advise our readers to have a safe and festive July 4th holiday!