On March 24, 2011, we sent out a newsletter detailing the “economic nexus” rules that had recently come into effect in California. As discussed therein, the “nexus” rules are put into place by states to establish the minimum contacts, or conduct, necessary to establish a sufficient connection (i.e., “nexus”) between the business and the state to give the state the legal power to tax the business. The nexus rules discussed in our prior newsletter pertain to California franchise and income taxes and are designed to primarily affect out-of-state corporations and pass-through entities and their equity holders that have property, payroll or sales in California.

California has now set its sights on boosting use tax revenue to help cover the recurring budget shortfalls. On June 28, 2011, Governor Edmund G. Brown, Jr., signed into law ABx1 28 (the “Legislation”) which expands the use tax registration requirements for out-of-state retailers. By way of background, California’s sales tax generally applies to the sale of merchandise in the state. California’s use tax, on the other hand, is generally imposed on the storage, use, or other consumption of merchandise within the state (in instances where sales tax is not applicable). With certain exceptions, any “retailer engaged in business in [the] state” that makes a sale subject to California use tax is required to register with the California State Board of Equalization and collect and remit any use taxes due.