The Supreme Court’s decision in South Dakota v. Wayfair, Inc. [585 U.S. __, (2018)] has driven the most substantive changes to the state and local tax landscape in nearly 30 years, requiring prompt attention from practitioners to address the evolving implications of economic nexus on clients’ operations (“Changing the State and Local Tax Nexus Playing Fields,” The CPA Journal, May 2019, http://bit.ly/31HQQxh). To properly advise entities that do business in multiple jurisdictions, CPAs must remain apprised of developments in key states. This article will provide an overview of recent developments in California that highlight the need for flexibility by legislators working to define practical thresholds without unduly burdening taxpayers.
On April 25, California Governor Gavin Newsom signed into law Assembly Bill (AB) 147, which revises California’s economic nexus provisions and enacts the Marketplace Facilitator Act. Specifically, AB 147 eliminates the transaction volume threshold (formerly 200 sales) for purposes of California’s economic nexus, and increases the state’s economic nexus threshold to $500,000 in cumulative sales of tangible personal property in California by the retailer and all persons related to the retailer, effective April 1, 2019. Furthermore, AB 147 enacts the Marketplace Facilitator Act, which requires that for transactions occurring on or after October 1, 2019, marketplace facilitators (as defined in the statute) collect and remit sales or use tax on behalf of marketplace sellers, subject to limited exceptions.
In late 2018, the California legislature responded to Wayfair by enacting an economic nexus provision. The new rules, which were effective April 1, 2019, required retailers to collect and remit California use tax if, in the prior or current calendar year, their sales into the state exceeded $100,000, or if they made sales into the state in at least 200 separate transactions. The enactment of AB 147 increases the sales amount threshold to $500,000 and eliminates the 200 transactions threshold altogether. Notably, the California legislature declined to impose a retroactive registration and collection requirement on remote sellers. The economic nexus provisions became effective April 1, 2019.
Prior to the enactment of AB 147, retailers that were registered or required to be registered with the California Department of Tax and Fee Administration (CDTFA) had to collect and remit district use tax (i.e., levied by cities, counties, or other municipalities) beginning on April 1, 2019, if their sales into a district during the preceding or current calendar year exceeded the economic nexus thresholds. The enactment of AB 147 now ties a retailer’s district use tax collection obligations to the state economic nexus threshold, effective April 1, 2019. Notably, for transactions occurring on or after April 1, a retailer with economic nexus in the state must also collect any applicable district taxes on all sales into the state independent of the retailer’s sales volume at the district level.
Prior to the enactment of AB 147, California did not have any laws related to sales facilitated by marketplace facilitators.
The $500,000 Economic Nexus Threshold
Effective April 1, 2019, a retailer engages in business in California if, in the current or prior calendar year, the retailer has total combined sales of tangible personal property for delivery in the state by it and all persons related to it under Internal Revenue Code (IRC) section 267(b) and its regulations exceeding $500,000. Relief may be available to certain retailers engaged in business in California for interest or penalties imposed on use tax liabilities for tax reporting periods beginning April 1, 2019, through December 31, 2022.
By revising the applicable economic nexus thresholds, California has granted relief to small businesses making sales in California not exceeding $500,000. Being relieved of such collection, remittance, and compliance obligations helps small businesses retain more capital, thereby supporting reinvestment, which allows them to remain competitive against larger businesses with greater resources. Remote sellers having no more than $500,000 in California sales in the current or prior calendar year may now make an unlimited number of sales into the state without triggering a collection obligation.
AB 147 also ties collection and remittance obligations for purposes of district use taxes to the revised state economic nexus provisions. Specifically, a retailer is deemed to engage in business in a district if in the preceding calendar year or the current calendar year, the retailer’s total combined sales of tangible personal property in the state, or for delivery in the state, by it and all persons related to it exceed $500,000. Thus, any retailer meeting the California economic nexus threshold must also collect and remit district use taxes.
Impact of New Economic Nexus Threshold
Effective April 1, 2019, a remote seller must register with the CDTFA and collect California use tax if, in the current or prior calendar year, it has total combined sales of tangible personal property for delivery in the state by it and all persons related to it under IRC section 267(b) and its regulations exceeding $500,000. Furthermore, sellers meeting the $500,000 economic nexus threshold in the state must also collect any applicable district use tax, independent of whether the economic nexus threshold is met in a particular district, which relieves taxpayers of the onerous task of tracking economic activity at the district level for purposes of a separate, district-level economic nexus threshold.
Beginning October 1, 2019, a marketplace facilitator will be considered the seller and retailer for each sale facilitated through its marketplace for purposes of determining whether it must register with the CDTFA and collect and remit sales and use tax. Furthermore, in determining whether a marketplace facilitator has met the $500,000 threshold, it will need to include 1) all sales made on its own behalf, 2) sales by all related persons, and 3) all sales facilitated on behalf of marketplace sellers.
Sellers meeting the $500,000 economic nexus threshold in the state must also collect any applicable district use tax.
A marketplace facilitator for these purposes is “a person who contracts with marketplace sellers to facilitate for consideration, regardless of whether deducted as fees from the transaction, the sale of the marketplace seller’s products through a marketplace operated by the person or a related person and who”—
- directly or indirectly, through one or more related persons,
- transmits or otherwise communicates the offer or acceptance between the buyer and seller;
- owns or operates the infrastructure, electronic or physical, or technology that brings buyers and sellers together;
- provides a virtual currency that buyers are allowed or required to use to purchase products from the seller; or
- engages in software development or research and development activities related to payment processing services, fulfillment or storage services, listing products for sale, setting prices, branding sales as those of the marketplace facilitator, order taking, or providing customer service or accepting or assisting with returns or exchanges; and
- directly or indirectly, through one or more related persons, engages in payment processing services, fulfillment or storage services, listing products for sale, setting prices, branding sales as those of the marketplace facilitator, order taking, providing customer service, or accepting or assisting with returns or exchanges, with respect to the marketplace seller’s products.
Impact of Marketplace Facilitator Act
Beginning October 1, 2019, registered marketplace facilitators in California that facilitate a retail sale by a marketplace seller must collect and remit sales or use tax on behalf of those marketplace sellers, with limited exceptions. Although marketplace sellers must include all sales into California, including those facilitated through any marketplace facilitator’s marketplace, for purposes of determining whether they have economic nexus in the state, they need only collect and remit tax on sales notfacilitated through a registered marketplace facilitator.
This is a dynamic area of state and local tax, and CPAs need to be aware of these rules as they evaluate a business’s potential nexuses and related state and local sales tax compliance obligations. Clearly, taxpayers making sales into California should take steps to familiarize themselves with the revised economic nexus provisions and the new marketplace facilitator provisions to ensure compliance.