California on track to tax remote sales starting April 1, 2019

Update 7.15.2019: Due to the enactment of Senate Bill 92 in late June, the district tax ordinance is effective April 25, 2019, rather than April 1, 2019. The California Department of Tax and Fee Administration (CDTFA) explains that the date change "eliminates the retroactive effect of AB 147 with regard to the new district use tax collection requirement." See the CDTFA for more details.

Update 4.26.2019: The California Legislature has increased the economic nexus threshold. Retroactively as of April 1, 2019, an out-of-state seller must register with the California Department of Tax and Fee Administration (CDTFA) and collect and remit California sales and use tax if its total combined sales of tangible personal property for delivery in the state exceed $500,000 in the preceding or current calendar year. The 200 transactions threshold is eliminated. In addition, as of October 1, 2019, marketplace facilitators must collect and remit sales tax on all sales made through the marketplace in California. See AB 147 for more details.

Out-of-state retailers doing a certain amount of business in California will soon have to collect sales tax* on their California transactions. Likewise, in-state retailers doing a certain amount of business in districts where they have no physical presence will soon have to collect those district taxes. Both requirements are on track to take effect April 1, 2019.

According to the California Department of Tax and Fee Administration (CDTFA), the upcoming changes don’t represent a tax increase or a new tax: The CDTFA is merely enforcing existing sales and use tax law as permitted by South Dakota v. Wayfair, Inc., the June 21, 2018, ruling by the Supreme Court of the United States that rocked the world of sales tax.

Prior to the Wayfair ruling, states were prohibited from imposing a sales or use tax collection obligation on businesses with no physical presence in the state. The Supreme Court found this physical presence constraint to be “unsound and incorrect.” It determined that in addition to physical presence, a sales tax collection obligation could be established through “economic and virtual contacts” with the state (economic nexus).

The high court didn’t establish guidelines as to how states could tax remote sales, as it previously did with the physical presence rule. However, it did underscore three aspects of South Dakota’s tax system that seem “designed to prevent discrimination against or undue burdens upon interstate commerce”: South Dakota prohibits retroactive enforcement of economic nexus; it allows an exception for small sellers; and it’s a member of the Streamlined Sales and Use Tax Agreement (SST), meaning it’s worked to simplify remote seller sales tax compliance.

In developing its remote sales tax plan, the CDTFA closely emulated the South Dakota economic nexus law that triggered the Wayfair decision. Although California isn’t a member of the SST, the CDTFA adopted South Dakota’s small seller exception and is prohibiting retroactive enforcement of economic nexus.

New collection requirement for out-of-state sellers

Thus, as of April 1, 2019, a remote seller meeting either of the following thresholds in the state in the current or previous calendar year must register with the CDTFA and commence collecting California state sales tax:

• The retailer’s sales into California exceed $100,000, or
• The retailer made sales into California in 200 or more separate transactions.

If an out-of-state seller meets that threshold in one or more districts (e.g., Los Angeles County or San Diego), it must collect those district taxes, too. District taxes are administered by the CDTFA. Sellers not meeting the threshold in a district may voluntarily collect taxes in the district as a courtesy to their customers, who are otherwise required to remit consumer use tax to the CDTFA.

New collection requirement for in-state sellers

The new policy affects in-state retailers, too. Current law requires in-state businesses to collect and remit only the tax they have in common with California consumers; thus, a business located in Los Angeles collects the state sales tax on sales made to a consumer in San Francisco, but not the city’s local or district taxes.

Starting April 1, 2019, a California business meeting either of the following thresholds in a different district in the current or previous calendar year must collect and remit the applicable district tax:

• The retailer’s sales into the district exceed $100,000, or
• The retailer made sales into the district in 200 or more separate transactions.

As with out-of-state sellers, in-state sellers may voluntarily collect district taxes in districts where their sales are under the threshold.

The new requirements are a big deal. They'll impact huge numbers of in-state and out-of-state businesses.

Monthly sales tax collections in the Mount Rushmore State have increased by more than $1 million since remote sellers with more than $100,000 in sales or at least 200 transactions started collecting South Dakota sales tax on November 1, 2018 — and fewer than 900,000 people reside in South Dakota.

By comparison, more than 13 million people live in the Los Angeles metropolitan area alone. California as a whole has a population of almost 40 million. It’s the fifth largest economy in the world.

What that means is that out-of-state businesses are much more likely to hit the $100,000 sales/200 transactions threshold in California than they are in South Dakota; and California businesses are likely to hit the threshold in multiple districts.

When asked last fall whether it would be willing to create a higher threshold, the CDTFA said it lacked the authority to stray far from South Dakota’s economic nexus law — although that logic seems debatable since there are no district tax requirements for South Dakota businesses. In any case, the CDTFA said it “would be interested if the Legislature and the governor were interested in making those policy determinations.”

Enter the California State Legislature, which is currently considering a measure to:

• Eliminate California’s existing affiliate and click-through nexus policy
• Eliminate the transactions threshold for economic nexus
• Increase the sales threshold for economic nexus
• Require marketplace facilitators to collect and remit tax on third-party sales in the state

Potential sales tax changes looming

There have been several iterations of Assembly Bill 147, the most recent occurring on March 11, 2019.

This version would eliminate affiliate and click-through nexus in California, which imposes a sales tax collection obligation on affiliates and “any retailer entering into agreements under which persons in this state … refer potential purchasers of tangible personal property to the retailer,” provided the retailer has more than $1 million in total cumulative sales of tangible personal property in California during the preceding 12 months: “This bill would eliminate, on April 1, 2019, the specific inclusion of those retailers as a retailer engaged in business in this state.”

AB 147 would also eliminate the 200 transactions threshold and raise the $100,000 sales threshold to $500,000, both for out-of-state businesses selling into the state and in-state businesses selling into other districts.

Finally, AB 147 would require marketplace facilitators to collect and remit California sales tax on behalf of their third-party vendors as of October 1, 2019. Thus, marketplace sellers that surpass the economic nexus threshold would have to register with the state and commence sales tax collection as of April 1, 2019, only to turn that job over to their marketplace facilitators six months later.

The waiting place

California lawmakers sure aren’t making it easy for businesses to plan. If AB 147 is enacted, the $500,000 threshold will take effect April 1, 2019. That’s 11 days from now.

Of course, there’s no guarantee AB 147 will pass, or that Governor Gavin Newsom will sign it if it does. According to the governor’s budget summary, the CDTFA’s plan will result in “an additional $219 million in tax revenue in 2018–19 and $554 million in 2019–20.” Increasing the threshold to $500,000 and eliminating the transactions threshold would reduce that revenue, which the new governor may not want to do.

A final consideration

The CDTFA isn’t pursuing retroactive enforcement of economic nexus. However, it has been quietly reaching out to businesses that already make sales in California through the Amazon marketplace.

The CDTFA requested and obtained information about Amazon’s third-party sellers last fall. Since then, numerous Fulfillment by Amazon (FBA) sellers with inventory stored in California have been contacted by the CDTFA and are being told they’re required to register with the state and collect tax on their sales into California. It’s unclear whether the CDTFA is holding FBA sellers liable for taxes not collected on past sales.

Fiona Ma, Treasurer of the State of California, has written a letter to the governor requesting his office “direct CDTFA to cease this activity.” She would like third-party sellers to be freed from the obligation to collect California sales tax “either prospectively or retroactively.” In her view, the marketplace (i.e., Amazon) is liable for the tax, not the individual marketplace sellers.

While waiting to see what transpires in California, learn how other states are taxing remote sales.

*Out-of-state sellers actually collect use tax from California consumers, not sales tax. However, sales and use tax are two sides of the same coin. For simplicity’s sake, we refer to the tax as sales tax.