California will become the latest state to require out-of-state sellers to start collecting use taxes on April 1.
In many ways, the structure that the California Department of Tax and Fee Administration (CDTFA) spelled out in December resembles that of the more than 30 states that already have online sales tax laws in place; CDTFA will require online retailers that do not have a physical presence in the state to collect sales tax if they generate more than $100,000 of gross sales or services and at least 200 transactions annually in the state. The requirement is not retroactive and applies only to sales made on and after April 1, 2019. Retailers that exceed those thresholds in any of California’s 28 taxing jurisdictions also will have to collect and remit that area’s taxes.
California is the latest state to put into effect regulations around the sales tax issue since the U.S. Supreme Court ruled in the South Dakota v. Wayfair Inc. case that, for the first time, states and local governments could require online retailers to collect sales tax even if they don’t have a physical presence, or nexus, in the state or local tax jurisdiction.
However, the impact of California requiring out-of-state sellers to collect and remit use taxes is significant given CDTFA’s low dollar and volume thresholds and the state’s massive population, which is 39.1 million residents or roughly for 12.2% of the U.S. population, says David Seiden, partner and state and local sales tax practice lead at the accounting firm Citrin Cooperman.
And, at the same time that a number of retailers are preparing to begin collecting and remitting use taxes in California, thousands of other retailers that use Fulfillment by Amazon are dealing with another online sales tax issue in the state. CDTFA is leveraging information on sellers whose products were stored in Amazon distribution centers in the state that Amazon provided to the agency last November to seek to collect back taxes going back to 2012. Amazon has about two dozen fulfillment centers in California.
“We have clients that are coming to us and telling us that their back-of-the-envelope calculation is that they’re liable for seven figures in taxes that they didn’t know they were expected to collect and remit,” Seiden says. “That’s enough to put a small business out of business.”
Citrin Cooperman is actively engaged in discussions with law firms regarding how to pursue litigation to go after CDTFA’s actions. “There’s a technical argument that Amazon is the actual retailer in the transaction that involves FBA users and it is Amazon, not the seller, that should be on the hook for the back taxes,” Seiden says.
CDTFA’s actions are also receiving push-back from California treasurer Fiona Ma who earlier this month sent a letter to Gov. Gavin Newsom that argued the agency’s actions are “unlawful, unconstitutional and impractical.”
The letter argues that CDTFA is ignoring a “plain reading” of California law. She also notes that its push is impractical given that 38% of FBA sellers are located in China. Newsom has yet to respond.
Read about how e-retailers are navigating the hodgepodge of state laws and regulations in Internet Retailer magazine’s story, “The Supreme Court overturned Quill. Now what?” (register for a free membership to view this content) or listen to an Internet Retailer webinar on the topic here. You can find additional resources and research available here.