California steps closer to taxing remote sales

Update 12.13.2018: The California Department of Tax and Fee Administration has announced that certain out-of-state retailers will be required to collect and remit California sales tax starting April 1, 2019. Additional information. 
 

The California Department of Tax and Fee Administration (CDTFA) recently hosted a public discussion on South Dakota v. Wayfair, Inc. and its impact on California sales and use tax collection requirements. Like many states, California intends to adopt new collection and reporting requirements for remote sellers now that the Supreme Court of the United States has removed the physical presence requirement that once prevented states from taxing remote sales.

California expects to have a remote sales tax policy in place by the end of the year, but it’s still hammering out the details. In the recent meeting, the CDTFA hinted at what the new policy will look like and fielded questions from interested parties (e.g., business owners and sales tax wonks).

California’s remote sales tax plan

According to the CDTFA, Wayfair has freed the state to enforce a 2011 law. California Revenue and Taxation Code 6203(C) defines “retailer engaged in business in this state” as “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.” 

California will follow South Dakota’s lead and provide a safe harbor for small sellers. Under South Dakota’s economic nexus law, a remote seller is required to collect and remit only if it has more than $100,000 in sales or at least 200 separate transactions in the state in the current or preceding calendar year. The CDTFA indicated it will adopt the same small seller exception.

During the discussion, the CDTFA was asked if it would be open to creating a higher threshold given California’s size — close to 40 million people live in California, while fewer than one million call South Dakota home, and California has the fifth largest economy in the world. The CDTFA’s response was unequivocal: It doesn’t have the authority to pick a threshold that differs from the one approved by the Supreme Court in Wayfair; for such a change to be made, the California Legislature would need to get involved. However, CDTFA head Nicolas Maduros said, “I think the department would be interested if the Legislature and the governor were interested in making those policy determinations.”

It’s a curious response given other significant differences between the sales tax systems of California and South Dakota. Two stand out: California’s origin sourcing of district taxes; and California’s lack of membership in the Streamlined Sales and Use Tax Agreement (SSUTA).

District tax collection requirements for in-state and out-of-state sellers

District taxes in California are based on the origin of the sale (the location of the seller). Under current law, neither in-state nor out-of-state sellers are required to collect and remit district taxes unless they have a physical presence in the district.

That will change once California adopts its new remote sales tax law. The CDTFA explained that both in-state and out-of-state retailers would be required to collect district taxes and remit them to the CDTFA if they’re “engaged in business in a district” — meaning they have more than $100,000 in sales or 200 transactions in a district.

For out-of-state sellers, the CDTFA’s Robert Tucker explained, “The threshold would apply to … each district, individually.… [I]t’s not simply meeting one threshold into the state.”

In-state sellers won’t have to worry about meeting a state-level threshold, but they will have to track their sales in each jurisdiction. Once their annual sales in a district surpass the small seller exception, they’ll have to start collecting and remitting those district’s taxes.

Streamlined Sales Tax

California’s lack of membership in the SSUTA, or Streamlined Sales Tax (SST), is another marked difference between California and South Dakota.

In the South Dakota v. Wayfair, Inc. decision, the Supreme Court highlighted three aspects of South Dakota’s tax system that it judged to “prevent discrimination against or undue burdens upon interstate commerce.” These are:

1. A safe harbor for small sellers
2. No retroactive enforcement
3. Membership in the Streamlined Sales and Use Tax Agreement

Like other states that have adopted economic nexus, California will provide an exception for small sellers. And during the recent Wayfair discussion, the CDTFA said there would be no retroactive enforcement of its forthcoming remote sales tax law. However, California is not an SST member state.

SST member states have standardized aspects of sales and use tax to reduce administrative and compliance costs for businesses. In Wayfair, the court praised SST member states for:

• Requiring a single, state-level tax administration
• Adopting uniform definitions of products and services, and other uniform rules
• Having simplified tax rate structures
• Providing sellers access to sales tax administration paid for by the state
• Protecting sellers who use such software from audit liability

As the proposed requirement to track economic nexus thresholds in each district suggests, California has not done all it could to simplify sales tax administration for in-state or out-of-state sellers. This could lead to problems down the line.

Since the Wayfair decision was announced, there’s been a concern that straying too far from the South Dakota model could trigger a legal challenge. As the Tax Foundation notes, “The Court laid out why South Dakota’s law is no burden to interstate commerce but made clear that more complex or overreaching laws would be.”

At least one participant in the recent CDTFA Wayfair discussion voiced concerns over the complexity of California’s sales tax regime — Randy Ferris, former chief counsel of the California State Board of Equalization, which used to administer sales and use tax in the state before the establishment of the CDTFA. Nonetheless, the CDTFA seems intent on taxing remote sales in the coming months.

Want to know where you have (or could soon trigger) economic nexus? Check out Avalara’s state-by-state guide to economic nexus rules.