The sleeping giant awakens: California looks for best way to tax out-of-state sellers

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. 

California, the state with the fifth-largest economy in the world, doesn’t yet require many out-of-state sellers to collect and remit tax on their California sales. That may soon change.

On June 21, 2018, the Supreme Court of the United States ruled that a state can tax sales by an out-of-state business (South Dakota v. Wayfair, Inc.). Prior to the Wayfair ruling, a state could tax sales by businesses with a physical presence in the state, but not those by remote sellers. In Wayfair, the court found this physical presence rule to be “unsound and incorrect,” thus opening the door for states to tax remote as well as in-state sales.

The Wayfair ruling centered on South Dakota’s economic nexus law, which imposes a tax collection obligation on businesses with more than $100,000 in annual gross revenue from South Dakota sales, or at least 200 sales of tangible personal property or services delivered or transferred electronically to South Dakota customers in one year.

Many states have adopted South Dakota–style economic nexus in the wake of the ruling. Some (e.g., Hawaii, Indiana, and Vermont) had unenforced economic nexus laws waiting in the wings, while others (e.g., Michigan and New Jersey) were quick to establish new laws. California is not among them.

However, California was an early adopter of affiliate and click-through nexus. Current law imposes a tax collection obligation on a remote seller that generated $10,000 in California sales through referrals from in-state affiliates, and sold more than $1 million in products to California consumers in the preceding 12 months. And now it may be looking to amend and expand its law in response to Wayfair. 

Governor Jerry Brown has circulated a proposal (hat tip to Bloomberg BNA) seeking “to modernize California law consistent with the holding of Wayfair,” and “to ensure that small businesses are not unduly burdened by the default expansion of the duty to collect use tax due to Wayfair.”

Economic nexus

Like South Dakota’s law, the proposal contains a small seller exception. However, California is considering a much higher threshold than $100,000 or 200 transactions. It’s only looking at taxing any retailer that, in the current or preceding calendar year, has more than $500,000 in total cumulative sales of tangible personal property to California purchasers.

The proposal would also amend the threshold for the existing affiliate and click-through nexus law. Retailers would have to have total cumulative sales of tangible personal property to purchasers in the state of $500,000 rather than $1 million.

Marketplace facilitator tax

Additionally, the proposal would include marketplace facilitators in the definition of “retailer.” Those that meet the $500,000 threshold would be required to collect and remit California use tax on behalf of marketplace sellers not already registered to collect and remit California tax.

Still percolating

There’s no guarantee the above proposal will be adopted. Earlier this month, Bloomberg BNA acquired a document describing new tax collection requirements for retailers making sales for delivery into California. It outlined South Dakota–style economic nexus thresholds: at least 200 separate transactions or more than $100,000 from sales into the state.

Accord to Bloomberg, a spokesman for the California Department of Tax and Fee Administration (CDTFA) explained that it “was an unofficial, internal-only document that was inadvertently placed on our test website. It was a draft written prior to the Supreme Court ruling and was not for publication or public distribution. Now that the court has issued its ruling, CDTFA is currently evaluating the next steps in a thoughtful manner that supports California taxpayers.”

Wayfair impacts many states and many businesses

One way or another, the Wayfair ruling is likely to impact the California tax collection obligations of remote sellers. The more time passes since the opinion was released, the more states are responding to it.

Learn more about Wayfair and its impact of state sales tax laws here.