The California Department of Tax and Fee Administration (CDTFA) recently issued a special notice updating out-of-state e-retailers regarding their sales and use tax obligations for products delivered to California consumers. Specifically, beginning October 1, 2019, it will be the marketplace facilitator, rather than the marketplace seller, who will be responsible for collecting and paying sales and use tax on retail sales.
For months, many out-of-state retailers have been working to determine the extent to which they may owe tax to California for sales made in prior years, even though they had no physical nexus in California. Following the U.S. Supreme Court's decision in Wayfair v. South Dakota, California took the position that out-of-state retailers who utilize Amazon to hold inventory and make sales to customers in California have sufficient nexus to meet the requirements to collect and pay sales/use tax to California. This was true even if the business sent inventory to Amazon outside of California and Amazon made the determination to store inventory in California.
The California Department of Tax and Fee Administration (CDTFA) recently announced it is offering relief to certain out-of-state retailers (referred to as "marketplace sellers") who are considered to be engaged in business in the state of California based solely on their use of in-state fulfillment centers to store inventory. Qualifying retailers may be entitled to reduced tax liabilities, penalties, and interest, effective June 27, 2019.
On April 25, 2019, the Governor of California approved Assembly Bill No. 147, which sets the economic nexus threshold at $500,000 in sales or deliveries to California, cumulative over 12 months. This will come as some relief to many out-of-state retailers affected by last year's U.S. Supreme Court case, South Dakota v. Wayfair, Inc., the case that overturned the long-standing principle set in Quill Corp. v. North Dakota requiring physical presence for a retailer to be subject to state sales and use taxes.
Help may be coming for retailers concerned with the abrupt change in the law last year that may require many retailers to begin collecting tax on sales to customers in a state regardless of whether the retailer has a physical presence in the state. In 2018, the U.S. Supreme Court's holding in Wayfair v. South Dakota allowed states to require remote retailers to collect taxes and fees on sales in their state if the seller was deemed to have an economic nexus with the state, regardless of any physical presence. On January 9, 2019, relief legislation was announced, known as the "Protecting Business from Burdensome Compliance Cost Act," which would delay the imposition of new laws to January 1, 2020, and would require states to streamline the tax rate and submission requirements. Click here to read about HR 379.
The California Legislative Analyst's Office (LAO) released a fiscal outlook report recently that indicates California will soon be implementing changes to sales and use tax collection for out-of-state businesses in the wake of the June 2018 Wayfair decision. "The administration plans to start registering out-of-state taxpayers soon," the LAO wrote, and anticipates increases to state revenue from related changes starting around $100 million or more in the next couple years. To read the full report, click here.
Back in June, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc. that reversed Quill's requirement for physical presence to establish sales tax nexus for out-of-state businesses. Individual states are now hurrying to decide upon economic or transactional thresholds to govern who should be collecting and paying over sales tax concerning primarily e-commerce sales.
In a 5-4 decision, the Supreme Court ruled today that states may now require online retailers to collect sales taxes from consumers, regardless of where the business is located or the product is delivered. In 1992, the same court ruled that a business had to have some kind of "physical presence" or "nexus" in order to be required to collect sales tax in a state. With the increased use of online shopping, however, it turns out not all taxpayers report non-taxed purchases to the states in which they reside. In fact, an estimated $33.9 billion goes uncollected in sales taxes each year, costing states a significant sum. Additionally, internet shopping tax-free has hurt the brick-and-mortar stores that already have higher operational costs due to a physical presence in a state, since they must collect sales tax on taxable transactions.
Californians will be able to vote on two new legislative measures related to taxes on the June 5, 2018 Statewide Direct Primary Election ballot.
South Dakota is taking the physical presence rule back to our nation's highest court in its dispute with Wayfair, Inc., to determine whether it may continue to require out-of-state sellers such as online retailers to register with the state and collect and pay over sales tax. In the seminal case from 1992, Quill Corp. v. North Dakota, the U.S. Supreme Court ruled that retailers did not have to collect sales tax in any state where they have no physical presence. However, the exponential growth of eCommerce and internet sales has significantly changed the retail landscape since that time.