TAX ALERT: Details of California’s “Wayfair” Nexus Law
California is one of several states now incorporating requirements for sale tax collection from online retailers located outside the state but delivering goods to buyers within. Based on the U.S. Supreme Court ruling in South Dakota v. Wayfair, California Assembly Bill 147 was signed into law by Governor Gavin Newsom on April 25, 2019. The new law, effective retroactive to April 1 of this year, requires retailers selling tangible personal property into the state to “collect tax from the purchaser, file a return and remit the tax to the California Department of Tax and Fee Administration (CDTFA).”
Details of California’s nexus law
California used the South Dakota law as a relative guide, where the threshold – or nexus – for collecting taxes by online retailers begins once sales reach $100,000 or 200 transactions in the state. California instructs retailers to begin collecting the 7.25% state tax on the sale of tangible personal property for delivery into the California once sales reach $500,000, but with no transaction threshold.
Furthermore, Special Notice L-591 was issued by the CDTFA to also take effect on April 1. This notice requires retailers to collect local use taxes once a threshold of $100,000 or 200 transactions has been reached within that locality or district, regardless of sales or transactions in another district within the state.
Another component of the new law addresses the sale of goods to California residents through platforms such as Amazon, eBay, Etsy and others, where the platform or “marketplace” facilitates the transaction. The marketplace facilitator must register as a seller with the CDTFA, collect sales tax on behalf of the seller, and remit the tax to the California tax department. This particular phase of the law is not scheduled to become effective until October 1, 2019.
Although the new California law will undoubtedly impact many online retailers, there is a provision that may provide some relief to smaller businesses. The temporary provision states that for businesses selling tangible personal property into California that is less than $1 million through the tax period ending December 31, 2022, taxes and fees may be waived by the CDFTA if the retailer registers with the state and was not required to do so prior to the law becoming effective.
More complications for retailers
It is estimated that anywhere from $1 billion to $2 billion of tax revenue went uncollected from out of state retailers and that the new law could provide an additional $500 million in tax revenue to the state.
Much of this depends on how simple California makes the tracking, reporting and payment of tax revenue by online retailers. While the collection of revenue based on a single, state-wide tax rate might be simple enough, the additional district taxes may potentially add complexity to the issue, making it more difficult to collect. Some states are offering allowances when retailers use automated tax software to track and collect taxes and not holding the retailer accountable if mistakes are made due to the software. This may be relatively easy at the state level but difficult at the district level, as every address must adhere to the latest zoning requirements for specific districts while also ensuring alignment according to the tax software being used.
What consumers must understand
For consumers in California, there may not be a significant change in the rate in which they buy online, as many are already paying sales tax on goods purchased this way. Any concern consumers have regarding a revoking of the Internet Tax Freedom Act (ITFA) should be alleviated, as the ITFA only prohibits states from levying tax on internet access, not the sale of tangible personal property.
It is likely that California will see additional tax revenue with the implementation of this new law. How much revenue will remain to be seen, especially with the $500,000 threshold as well as the provisional leniency for smaller businesses until 2022.