California remote sales tax limbo – Wacky Tax Wednesday

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 game is over. Effective retroactively to 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.

On April 1, 2019, a day filled with wily tricks, new sales and use tax collection requirements took effect in California for both in-state and out-of-state sellers. In what feels like some kind of late April Fools’ joke, the California Legislature may soon change those requirements.

Sales tax collection requirements as of April 1

Starting April 1, the California Department of Tax and Fee Administration (CDTFA) requires out-of-state sellers to collect and remit the state sales and use tax if, in the current or preceding calendar year, their sales into the state exceed $100,000 or they made at least 200 separate transactions for delivery into California.

Both in-state and out-of-state sellers are required to collect a district’s taxes in addition to the state sales tax if, in the current or preceding calendar year, the seller’s sales into the district exceed the $100,000 sales/200 transactions threshold.

Businesses that met that threshold in 2018 or thus far in 2019 should now be collecting California state and applicable local sales and use tax. But that could soon change.

Proposed sales tax collection requirement changes

California Assembly Bill 147 has been making its way through the Legislature since it was introduced in mid-December. It’s encountered little to no opposition thus far and is expected to be delivered to the governor’s desk by the end of this week. If enacted as written, it would significantly increase the remote seller economic nexus sales threshold and make several other notable changes to California sales and use tax law as well as the remote sales tax rule that took effect on April 1.

AB 147 would:

• Change the sales threshold to more than $500,000 in total combined sales of tangible personal property in California by the retailer and all persons related to the retailer, effective April 1, 2019;
• Eliminate the 200 sales transactions threshold effective April 1, 2019;
  
• Eliminate district tax economic nexus effective April 1, 2019, so any remote seller that surpasses the $500,000 threshold is required by all districts to collect all applicable district use taxes; and
  
• Require marketplace facilitators that surpass the $500,000 threshold to register with the department and collect and remit sales tax on behalf of marketplace sellers in California starting October 1, 2019; sales made on its own behalf, by all related persons, and by marketplace sellers must be included when calculating total combined sales of tangible personal property for delivery in California.
  

In addition to the above, the bill appears to eliminate existing affiliate and click-through nexus provisions. As of April 1, 2019, it would exclude from the definition of a retailer engaged in business in California “(1) any retailer that is a member of a commonly controlled group and is a member of a combined reporting group that includes another member of the retailer’s commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performs services in this state in connection with tangible personal property to be sold by the retailer and (2) any retailer entering into agreements under which persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an internet-based link or an internet website, or otherwise, provided that the retailer meets specified total cumulative sales thresholds including that the retailer has, during the preceding 12 months, total cumulative sales in this state of tangible personal property in excess of $1,000,000.”

Finally, for tax reporting periods beginning April 1, 2019, and ending December 31, 2022, the measure authorizes the CDTFA to relieve penalties and all or any portion of the interest owed by a retailer that:

• Registers on or after April 1, 2019;
• Has no more than $1,000,000 in combined sales within the preceding 12 months (from the retailer and all related persons) of tangible personal property in this state or for delivery in this state;
• Was not previously registered or required to be registered;
• Failed to collect and remit use tax due to a good faith error and notwithstanding the exercise of ordinary care and the absence of willful neglect; and
• Is not a marketplace facilitator as defined in Section 6041.

As AB 147 is still a work in progress, any of the proposed changes described above are subject to change.

So, how are retailers to know what to do right now with respect to the changes that took effect April 1? Well, that’s the joke: Retailers that meet the $100,000 sales/200 transactions threshold and fail to comply with the rule risk being out of compliance. But if AB 147 passes, any sellers that have more than $100,000 in sales or 200 transactions but less than $500,000 in sales in the state may soon find they’re not required to collect in California sales or use tax. And if they’re already registered and collecting? April Fools!

It’s good, right?

Avalara is compiling a growing list of states that require out-of-state sellers to collect and remit sales tax. If California does change the policy that took effect April 1, we’ll let you know.