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Selling in California? Your Out-of-State Business May Have to Pay Sales Tax

  • Oct 21, 2015 | Stephanie Faris

Out-of-state sales have been an ongoing debate for states across the nation. As online retailers continue to dominate the marketplace, local businesses are at a constant disadvantage. By avoiding sales tax, consumers in some states are able to get a better deal online than they can in local stores.

But like a few other states, California has leveled the playing field for local businesses. Since September 15, 2012, qualifying out-of-state businesses that sell to California residents must register with the state’s Board of Equalization to pay use tax on the items they sell. At the time the law was enacted, more than 200 out-of-state businesses that regularly did business in the state were sent letters notifying them of the change. In the years that have followed, businesses are expected to know when to register.

Qualifying Businesses

The new law, Bill AB 155, modified an existing law that states that a business with nexus in the state must pay sales tax on purchases made by its residents. With the change, the law was expanded to address a situation where California-based businesses were redirecting customers to an out-of-state website to circumvent the state’s sales tax requirements. However, the legislature only concerned itself with businesses making more than $10,000 a year in sales through that arrangement or one million dollars in total California sales.

For smaller businesses not located in California, the determining factor when it comes to sales tax will be “physical presence.” An out-of-state business that maintains an office, warehouse, or other type of business-related facility in the state will be considered to have nexus, even if that location is temporary. A business with an agent located in the state who is acting on that business’s behalf will also be determined to have nexus.

Consumer Liability

California residents are still being cautioned about buying out of state, especially where it applies to purchases made on popular ecommerce site Amazon.com. After the change, the state sent letters to 27,000 high-income California residents, reminding them of their own responsibilities when it comes to paying use tax on the out-of-state purchases they make each year. These residents were noted to have not claimed any use tax on their tax returns from 2008-2010.

By tightening its rules, California hoped to free consumers up from concerning themselves with calculating sales tax on their own. Out-of-state retailers are now expected to calculate the sales tax at the time of purchase and remit it to the California Board of Equalization. Previously, the state provided a calculation to help consumers guess their use tax if they didn’t retain their receipts. For consumers who make less than $20,000, the government suggested a use tax of $7. For those earning between $150,000 and $199,999, the suggestion was $123.

For out-of-state businesses without nexus in California, sales tax will likely not be necessary. However, the change in the law seeks to stop the practice of California businesses hiring out-of-state businesses to handle their sales in order to avoid sales tax collection. Local consumers are still expected to track their own online purchases and pay use tax when it isn’t being collected by out-of-state retailers.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Stephanie Faris
Avalara Author Stephanie Faris