How long after nexus ceases must a remote seller collect California sales tax?
The California Department of Tax and Fee Administration (CDTFA) has clarified how long retailers with no physical presence in the state must continue to collect state and local sales and use tax after their sales drop below the economic nexus threshold.
Under California’s economic nexus law, which took effect April 1, 2019, a remote retailer must register to collect California state and local (district) use tax* if total combined sales of tangible personal property for delivery in California by the retailer and all personnel related to the retailer exceed $500,000 during the current or preceding calendar year.
Some states require retailers to continue to collect and remit sales and use tax even after they no longer have nexus with the state, which is the connection that triggers a tax obligation. This is called trailing nexus, and it can last a month, a few months, or even a year. Trailing nexus laws vary by state.
Trailing nexus for California state use tax
A remote retailer must remain registered with the CDTFA and continue to collect state use tax throughout any calendar year its sales in California exceed the $500,000 economic nexus threshold described above, “and during the following calendar year.”
A remote retailer is not required to remain registered on January 1 of any subsequent year if, during the preceding calendar year, its sales (and sales by all related persons) of tangible personal property in the state didn’t exceed the $500,000 economic nexus threshold.
For example, a remote retailer whose California sales exceed the $500,000 economic nexus threshold in 2020 but not in 2021 or 2022 is required to register with the CDTFA as soon as its sales cross the economic nexus threshold in 2020 and collect and remit California state use tax through December 31, 2021.
As of January 1, 2022, the remote retailer is no longer required to maintain its Certificate of Registration and collect California use tax. However, it may voluntarily maintain its certificate with the CDTFA and continue collecting and remitting state use tax.
Trailing nexus for district use tax
Effective April 25, 2019, a remote retailer must collect district use tax in California if its sales in the state of California exceed the $500,000 economic nexus threshold. As with state use tax, the remote retailer must continue to collect district use tax for the remainder of that calendar year, as well as during the following calendar year.
The CDTFA provides more details and examples of how a retailer can establish nexus and how trailing nexus applies in California Code of Regulations, Title 18, Section 1684, Collection of Use Tax by Retailers.
Try our free sales tax risk assessment to find out if your business is at risk of having economic nexus in California or any other state.
* In-state sellers collect and remit sales tax in California; out-of-state sellers collect and remit use tax.
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