California could provide sales tax relief for certain Amazon sellers
Update 7.1.2019: SB 92 was signed into law on June 27, 2019.
In the year since the Supreme Court of the United States overruled a long-standing physical presence rule, more than 40 states have adopted economic nexus laws that base a sales tax collection obligation solely on a remote seller’s economic activity in the state. Yet retailers that sell through Amazon or other marketplaces may have already had an obligation to collect sales tax in states where their inventory is stored for sale.
No matter what your level of economic activity, having a physical presence in a state establishes nexus, a connection significant enough to trigger a sales tax collection obligation. Physical presence nexus can be established in several ways, including owning or leasing a brick-and-mortar building like an office, store, or warehouse, or by having temporary or permanent employees in a state. It can also be established by storing inventory for sale in a state, even if that inventory is stored in a warehouse or fulfillment center owned and operated by a third party.
Marketplace sellers with this sort of physical presence nexus may have flown under the radar of state tax authorities for years, but it’s getting harder for them to do so. States can require marketplaces to share marketplace seller information — we know Amazon has done that with at least Massachusetts and New York. Furthermore, marketplace sellers are required to identify themselves to tax departments once they establish economic nexus in a state.
The fact that inventory in a state can establish sales tax nexus for remote sellers can’t be emphasized enough. This is true in all states.
Limited relief for some marketplace sellers
However, a bill sitting on California Governor Gavin Newsom’s desk would provide some relief to businesses that (perhaps unwittingly) established nexus with the state through inventory stored for sale in a marketplace facilitator’s warehouse or fulfillment center. Senate Bill 92 “would limit the issuance of a deficiency determination” for qualifying retailers, defined as “a retailer that is or was engaged in business in this state solely because the retailer used a marketplace facilitator to facilitate sales for delivery in this state and for which the marketplace facilitator stored the retailer’s inventory in this state.”
Current policy allows the California Department of Tax and Fee Administration (CDTFA) to hold such marketplace sellers liable for up to eight years of use tax liability. If Gov. Newsom signs SB 92 into law, qualifying retailers would only be liable for the tax and penalties due on sales made from April 1, 2016, to March 31, 2019 — the three years preceding the April 1, 2019, enforcement date of economic nexus in California.
Not all marketplace sellers would be eligible to take advantage of this offering. It would only be open to retailers that are or were engaged in business in California solely because they used a marketplace facilitator to facilitate sales for delivery in California, and the facilitator stored the retailer’s inventory in the state. Furthermore:
- A retailer must not currently be registered with the CDTFA or have registered with the department prior to December 1, 2018; and
- A retailer must not have filed sales or use tax returns or made sales or use tax payments prior to being contacted by the CDTFA.
Finally, within 90 days after the effective date of this act, the retailer must voluntarily register with the CDTFA and file completed tax returns for all tax reporting periods for which a determination may be issued under this section. Retailers must pay in full the taxes due (or apply for an installment agreement under which the final payment is made no later than December 31, 2021).
Tweaking district use tax liability
The bill would also adjust district use tax liability in the state.
Existing law requires districts that impose use taxes to include a provision in their use tax ordinance stating that a seller is engaged in business in the district if, in the current or calendar year, it has more than $500,000 in total combined sales of tangible personal property in the state. This provision took effect on April 1, 2019.
SB 92 specifies that the district use tax ordinance provisions are operative on April 25, 2019, instead of April 1, 2019.
This could give affected sellers some breathing room. The existing district use tax provision was the result of a law that was enacted on April 25, but effective retroactively to April 1, 2019. Learn more about California’s sales tax bait and switch.
Gov. Newsom is expected to sign SB 92. If he does, bear in mind that while it does limit past use tax liability for sellers, it doesn’t do away with it altogether. If your business had inventory stored for sale in California between April 1, 2016, and March 31, 2019, or before, you should have a plan to get compliant. The team at Avalara Professional Services can help.
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