In a news release published on December 11, the California Department of Tax and Fee Administration formally announced their intent to join 30+ other U.S. states in the taxation of remote commerce. While formal rules have yet to be issued, California has been contemplating action since the Supreme Court issued their ruling in South Dakota v. Wayfair on June 21, 2018, and conducted a public hearing on the matter back on October 24.
What we know today:
1. The requirement will take effect on April 1, 2019.
2. California will impose this requirement on businesses with more than $100,000 of sales into California or who engage in 200+ separate transactions with California customers. This standard is identical to what is being enacted in most states. However, it’s worth noting that California is the largest U.S. state by population, consequently, its likely that many more sellers will meet these California thresholds and will meet them relatively quickly.
3. Like most other states, the rule will only apply to prospective transactions and not retroactively.
4. Remote sellers will be required to collect state tax as well as the statewide county tax and local tax (for a total combined rate of 7.25%). Additionally, remote sellers will also be required to collect district tax, the amount of which varies by location, in some instances. As the law stands today for sellers with physical presence, the requirement to collect district tax is determined on a district by district basis. Based on the Notice, California plans on requiring the same of remote sellers. That is, the obligation to collect district tax will likewise be determined on a District by District basis based upon whether the seller exceeds the $100,000 in sales/200 transactions threshold for that specific district.
The requirement to independently determine economic nexus on a local basis is unique to California and will undoubtedly present challenges to sellers. Other states faced with similar local challenges have opted for rules which apply a specialized rate for remote sellers (e.g. Alabama and Louisiana) or have enacted a requirement indicating that meeting the thresholds at the state level also requires local collection (e.g. Colorado). California plans to issue clarifying rules in 2019 and we suspect that those rules will address this District taxation requirement in some detail.
Today, California provides an open Application Program Interface (API) and other tools that provide taxpayers with assistance in knowing the particular state and local rates that apply to a given address. While certainly helpful, adopting these tools will not address challenges associated with determining correct product taxability and does not necessarily provide a path forward towards comprehensively addressing economic nexus requirements on a nationwide basis.
Of course, action by the California legislature could change things significantly. The possibility exists that when the legislature reconvenes in the new year they could enact a law which, while still requiring remote sellers to collect, applies a higher sales and/or transactional threshold. It will also be interesting to see whether, through legislation, California follows the lead of states like Washington and Pennsylvania in requiring marketplace sellers to collect on behalf of their clients.
California was one of a handful of states that had yet to formally announce their plans to tax remote commerce. As we move into the new year, it will be interesting to see how requirements in the remaining states, including Arizona, New York, and Florida, evolve.
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