California and the direct sales industry (6015b retailers)

For over seven years I had the opportunity to work in the direct sales/network marketing industry as a Sales & Use Tax Manager. When I started with the company, it was six months old, had done over six million dollars in domestic revenues and was registered for sales and use tax in one state and had filed one return, even though the company had been collecting in most states at the time. By the time I left in 2004, it was a worldwide company doing over $450 million in revenue.

In some states, it had  been determined that the company’s primary product was non-taxable/exempt (a 100% juice drink marketed as a dietary supplement), in others it was clearly taxable. My charge was two fold. File returns for moneys we had collected and get registered in those states where it was determined that we had nexus. Ultimately we ended up filing in all states but Montana, Oregon, Delaware and New Hampshire.

Also to continue the process of product taxability determination. This was done primarily through talking to State Revenue Departments and following up with a letter and copy of the product label and awaiting a response on whether or not our product was taxable.

As is common in that industry, product was taxed on the MSRP rather than what the company’s independent distributors actually paid for it, which at the time was a difference of $10/1 liter bottle; $40/case of 4 bottles.  Part of the reasoning behind this was industry practice and part due to a statute California had passed at some time in the past, which upon further reading appeared to be directed directly at the direct sales industry. This is Section 6015b of the Revenue and Taxation Code. That in part reads as follows:

Revenue and Taxation Code section 6015(b) provides that the Board, for the efficient administration of the sales and use tax laws, may regard any salespersons, representatives, peddlers, or canvassers as the agents of the dealers, distributors, supervisors, or employers under whom they operate or from whom they obtain the tangible personal property sold by them, irrespective on whose behalf they are making the sales, and may regard the dealers, distributors, supervisors, or employers as the retailer. Someone from our local Board office will contact you to determine if your company should be treated as a “section 6015 retailer.” If so, you will be notified in writing by the Board that your company is a section 6015 retailer. After notification from the Board, your company becomes the retailer of all the sales made by its distributors and must report and pay tax on the sales price charged by the distributors.

(Annotation 295.1508 letter dated 1/20/93)

The company had nexus on a couple of different fronts. 1) We used a third party manufacturing firm located in California to bottle our product, so the raw product came in from its source overseas (usually by boat, but sometimes by air) to the third party vendor where it sat until processed/bottled upon which time it was sent to our distribution facility in Utah. 2) Independent distributors, which under Scripto v. Carson would give the company nexus. (many more than the ten that Scripto had in Georgia in that case)

At a future point in time, we received a letter from the Board of Equalization notifying us that yes we were considered a 6015b retailer and had to comply with its provisions.  Our exposure in California at the time was in the low six figures per month. (>$1,200,000 annually) Fortunately we had no employees or offices as it made our audit a lot smoother. (no additional assessment for errors or use tax)

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About Brad Merrill

Brad W. Merrill is the Principal at Brad W. Merrill Accounting and Tax Services. He specializes in Sales & Use taxes and accounting for small businesses. He has a B.S. in Accounting from the David Eccles School of Business at the University of Utah.
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