California Revenue & Taxation Section 6203(c) put the state in an unusual position after the June 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. The California Department of Tax and Fee Administration (CDTFA) had to decide what the decision meant and administer that finding. Meanwhile, the state legislature had to determine its role and the timing of any action.
R&T Section 6203(c) provides: “Retailer engaged in business in this state” as used in this section and Section 6202 means any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty." This certainly meant something different on June 21, 2018 than it did prior to that date. With the Court finding that Quill and its physical presence standard for commerce clause nexus was "unsound and incorrect", what is the new standard?
The Court found the 2016 South Dakota law (SB 106) which was before it acceptable as a nexus standard due to these three features:
- Threshold - Collection obligations only exist if a seller had over $100,000 of sales into the state in the prior or current calendar year, or 200 or more transactions.
- No retroactive application.
- South Dakota adopted the Streamlined Sales and Use Tax Agreement (SSUTA) which provides some simplification and requires the state to offer free software to remote sellers and audit protection if they use it.
Well, how do those factors apply in California which is a much larger state than South Dakota and has not adopted the SSUTA and does not provide free software?
South Dakota has just under 1 million people which California has over 39 million. So, with far more buyer in California as well as far more business buyers, considering the worldwide market, the South Dakota threshold would cause hundreds of thousands of small businesses to become collectors of California sales tax In Etsy's amicus brief filed in the Wayfair case, it noted that in 2017, its 1.9 million sellers generated $3.25 billion of gross sales (page 8). That means average sales for an Etsy business of $1,710, well below the $100,000 threshold. But, it would be very easy for many of these businesses to have 200 or more transactions in California in a year. Think of all of the sellers using Fulfillment by Amazon (FBA), eBay, Etsy, crowdfunding sites, and others to sell low value items. With over 39 million possible buyers in California, the CDTFA should be seeing an incredible increase in registered sellers.
Can a state that does not follow the SSUTA or provide free software to remote vendors meet the Court's new nexus standard? We don't know.
Well, on December 11, the CDTFA announced that it would follow the South Dakota thresholds starting April 1, 2019 (NR-18-59). This allows some lead time for the thousands of remote vendors who crossed one of the thresholds in 2018 (the calendar year prior to 4/1/19). It also gives some time for all remote vendors to start tracking sales into California. However, the new procedure does not provide any lead time once you cross the threshold. For example, let's say a vendor selling $10 socks online makes its 200th transaction to a California customer on July 1, 2019, based on 2019 sales. It needs to register and start collecting immediately(similar in most other states as well). There is no lead time once the threshold is crossed to allow for updating or obtaining software and being prepared for the new compliance obligations. For more, see CDTFA Special Notice L-565 (Dec. 2018). Note: The CDTFA held a stakeholder meeting to explain its role per R&T 6203(c) and obtain income (see information and links here).
Another change announced December 11 affects both remote and in-state sellers. Many cities, counties and special districts in California have various sales taxes such as to help fund transportation. These are known as district taxes. Prior to Wayfair, an in-state vendor only had to collect them on sales delivered to districts where they had a physical presence. Now, they must be collected in districts where they meet the over $100,000 sales or 200 or more transactions threshold. See CDTFA Special Notice L-591 (Dec. 2018). So, even in-state sellers already collecting California sales tax must implement new recordkeeping requirements. The CDTFA notes that sellers might just want to "courtesy collect" the district tax for all California sales. That likely is easier than having to track sales into all counties unless the seller knows it won't meet the threshold anywhere so only has to collect where it has a physical presence.
The CDTFA provides a good deal of information on collection obligations at http://cdtfa.ca.gov/industry/wayfair.htm.
On December 10, the chairs of the state's tax committees announced that they would continue to look at whether changes are needed, noting that the decision might not work in a state with almost 40 million residents.
Certainly one area that lawmakers have to address is additional funding for the CDTFA to deal with the hundreds of thousands of new sales tax collectors that should be registering and perhaps seeking assistance of the CDTFA. These vendors are located throughout the world. Also, the CDTFA needs to get and regularly update data on the number of vendors outside of California that meet the threshold. If the number of registrants doesn't match this data, to be fair to instate tax collectors, the CDTFA needs to go out and find these vendors even though they are located throughout the world.
With such a low threshold of 200 or more transactions, the enforcement effort will be a poor use of resources. There needs to be a balance of what is realistic for the CDTFA to enforce among sellers versus continuing to collect use tax from California buyers.
Also, the risk of litigation in California or another state by small vendors challenging the 200 or more transactions threshold seems great. That threshold seems to impede interstate commerce, particularly where the transaction value is low. After all, someone selling $1 items would have to start collecting even though sales into one of several states now using the South Dakota standards is only $200!
We'll see what happens. The April 1, 2019 start date gives lawmakers time to act, such as by removing the transaction threshold and just using the $100,000 gross receipts threshold. They should also see about offering free software to remote vendors as that should help the CDTFA as well. And more funds should be allocated to the CDTFA to help with their expanded tax administration duties. The lawmakers' press release also includes a statement from former BOE member and now State Treasurer-elect Fiona Ma that suggests California should follow the lead of a few others states and have marketplace facilitators, such as Amazon collect.
Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:
- Sellers with California Customers? New Tax Obligations!
- Wayfair - What If the Respondents Were NOT Billion Dollar Sellers?
- With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?
- Idaho Keeps Sales Tax On Groceries
- Sales Tax Policy Outlook for 2017