California’s sales tax bait and switch – 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.

In my last Wacky Tax Wednesday post, California remote sales tax limbo, I wrote about how the California Legislature was looking at changing a sales and use tax rule that had recently taken effect. Well, it did. And for some sellers, that’s created a real headache.

To be fair, the changes adopted by the legislature should make sales tax compliance a bit simpler* for in-state and out-of-state sellers alike. The rule that took effect April 1 imposed a state sales/use tax collection obligation on out-of-state sellers with more than $100,000 in sales or at least 200 transactions in the state in the current or preceding calendar year. It also required in-state and out-of-state sellers to collect and remit district sales/use tax in any district where they surpassed the $100,000 sales/200 transactions threshold. 

The law enacted April 25 retroactively supersedes the previous rule. Thus, as of April 1, the transaction threshold is eliminated, and the sales threshold is increased to $500,000. The new law also eliminates the need to track sales in each district. And, starting October 1, 2019, it requires marketplace facilitators to collect sales/use tax on behalf of third-party sellers.

Learn more about California’s new economic nexus law.

While many businesses are undoubtedly pleased with the new policy, the fact that California adopted one set of rules/requirements as of April 1, changed them as of April 25, and set more changes for the not-too-distant future is a bit, well, maddening.

One Amazon seller vented her frustration in an Amazon Seller Central post dated April 29: “CA changed their requirements on sales tax!? Just got the email today! Am I reading this right? I can now close my account that I just opened last month with CA? –Bangs head against wall–”

She did read it right. According to a California Department of Tax and Fee Administration (CDTFA) notice: “If you are a remote seller who registered with the CDTFA to collect California use tax due to our prior direction (see Special Notice L-565), and you do not meet the new $500,000 sales threshold pursuant to AB 147, and do not have any contacts with California that would make you a retailer engaged in business in this state, you may either close your account or continue to collect the use tax as a courtesy to your California customers.”

She can’t be the only business to surpass the $100,000 sales/200 transactions threshold and register to collect California sales/use tax as of April 1, only to find out a few weeks later that her business doesn’t have an obligation to collect sales or use tax in California under the new $500,000 economic nexus threshold with no transaction component.

Furthermore, the businesses most likely to be impacted by this change are small and midsize sellers — those doing less than $500,000 in sales in the massive state — with fewer resources to devote to sales tax compliance.

More change coming for marketplace sellers

Businesses that sell only through large marketplaces like Amazon can look forward to another change this fall: As of October 1, 2019, marketplace providers that exceed the $500,000 sales threshold in California are obligated to collect and remit on behalf of their third-party sellers. Thus, a marketplace seller that surpasses the $500,000 and only sells through a collecting marketplace is required to register with the CDTFA and collect and remit California sales/use tax from April 1 through September 30, then hand that responsibility off to the marketplace come October 1.

Again, the changes will undoubtedly simplify sales and use tax compliance for many businesses in the end. In the interim, however, they create extra work. “–Bangs head against wall–”

Businesses like the frustrated Amazon seller may have known about the bill making its way through the legislature — we covered it several times in the Avalara blog — or not. It doesn’t really matter, because unless and until AB 147 became law, they were required to comply with the rule enforced by the CDTFA as of April 1.

A lot goes into bills, like AB 147, that impact state budgets, so the California Legislature probably had a good reason for waiting until after April 1 to approve a bill affecting a policy that took effect April 1. I hope it did. And Governor Gavin Newsom undoubtedly had good reasons for not immediately signing that bill into law. Maybe everything that happened needed to happen just the way it did.

Still, I can’t help but wonder if some of the pain the delay caused to some businesses could have been avoided.

Automating sales and use tax compliance won’t correct the recent sales tax bait and switch in California. However, it can facilitate sales tax compliance in the growing number of states that now require some out-of-state sellers to collect and remit sales tax.

*California isn’t the only state to enact simplification measures. Other states with similar steps include North Dakota and Washington.