We tested for browser compatibility before attempting to preload. Substantially Below Cost Over the Internet by David Colker and Jason Whong Many companies utilize the Internet to sell their products. Giving tangible property away or selling it at a substantial discount below cost raises significant use tax issues. This article analyzes four scenarios involving sales of property substantially below cost over the Internet under California sales and use tax law.
Similar issues are likely to arise under the laws of other states.
David Colker First, a retailer engaged in business in California that gives away a product to a consumer located in California must pay use tax based on the product's cost. If the retailer sells a product at substantially below cost to a consumer located in California, the imposition of use tax depends on the amount charged to the consumer. In this scenario, the imposition of California use tax is triggered by the place of fulfillment and causes the retailer to be engaged in business in California. If the retailer sells its products below cost and ships them from a California warehouse to a consumer located in California, the imposition of use tax depends on the amount charged as discussed above. It has been the Board's long-standing position that the making of a gift constitutes a taxable use of property in California.