Following the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. on June 21, 2018 overturning Quill’s physical presence requirement for sales tax nexus, state taxing authorities have been implementing new sales tax filing requirements similar to the legislation passed by South Dakota. This legislation requires “remote sellers” who exceed $100,000 of annual sales or engage in more than 200 or more separate transactions in the state to register and collect sales tax. (A remote seller is any business that sells products or services to customers in a state using the internet, mail order, or telephone without having physical presence in that state.)
On December 11, 2018, the California Department of Tax and Fee Administration (CDTFA) announced that it will be implementing new use tax collection requirements for out-of-state retailers (remote sellers) selling into California pursuant to the Wayfair decision.
Beginning April 1, 2019, out-of-state retailers making $100,000 or more of annual sales or 200 or more separate transactions into the state in the preceding or current calendar year are required to register and collect and remit California use tax. This requirement will only apply prospectively to retail sales of tangible personal property made on or after April 1, 2019. California does not tax services, unless the services are part of the sale of tangible personal property. Even though the use tax is owed by consumers, California tax law requires retailers who are “engaged in business in this state” to collect the use tax owed on their sales to California consumers and remit the tax directly to the CDTFA. Retailers will be required to charge the current statewide sales and use tax rate of 7.25% which includes 1.25% of local use taxes imposed throughout the state.
In addition to the above statewide tax rate, retailers will be required to collect district use taxes that apply in those areas where the retailer is considered to be “engaged in business in a taxing district.” Beginning April 1, 2019, a retailer is also considered engaged in business in each district if their sales into the district exceed $100,000 or they made sales into the district in 200 or more separate transactions, in the preceding or current calendar year.
The following example is posted on the CDTFA website:
Retailer without a physical presence in California:
You are located outside of California and have no physical presence in this state. During 2018, your sales of merchandise into California exceeded $200,000. Of those sales, over $100,000 were made for delivery into the city of San Jose which imposes a district tax; the remaining sales were made for delivery throughout the state and the sales did not exceed $100,000 in any other area in California.
Under the Wayfair decision, you are considered engaged in business in California and required to register with the CDTFA and collect the use tax at the statewide rate on your retail sales to California customers on and after April 1, 2019. In addition, you are also considered engaged in business in the city of San Jose (a taxing district) because your 2018 sales exceeded $100,000 into that district. As such, you are required to collect San Jose’s district use tax at the San Jose rate from your customers on your sales for delivery in the city of San Jose and pay the entire tax collected to the CDTFA. If your sales into other areas in California do not exceed $100,000 or equal 200 or more separate transactions during the preceding or current calendar year, you are only required to collect the statewide rate of 7.25% from your customers on your sales for delivery into those areas.
California’s sales thresholds are based on the retailer’s total sales price of tangible personal property or total number of transactions, which may include nontaxable sales, including sales for resale.
While we have expected California’s announcement of their Wayfair filing requirements for remote sellers for some time now, the thresholds the CDTFA have implemented are very different than what was anticipated. There were indications that the legislature was going to consider a $500,000 sales threshold, similar to what the State of Texas is implementing, however they adjourned for the year without considering this legislation. The CDTFA’s decision to use a sales threshold similar to South Dakota’s is questionable as $100,000 of sales into South Dakota is not the same as $100,000 of sales into California, due to population differences and the size of the economy in each state. This announcement is going to impact an extensive number of remote sellers who sell to consumers in California. Additionally, remote sellers will now have to track sales for individual districts as well to determine whether they exceed sales thresholds in different localities. There are over 200 district taxes imposed by cities and counties in California to track sales for (click here for district sales and use tax rates currently imposed in the state). Given that the CDTFA implemented these guidelines administratively, there is the possibility that California could face legal challenges or the legislature could still consider legislation imposing a different threshold.
As of December 2018, most states have either passed legislation or adopted new regulations or issued administrative pronouncements regarding new sales tax filing requirements for remote sellers in connection with the Wayfair decision. Currently, the following states have issued guidance about when their new sales tax filing requirements will become effective. These effective dates are:
Please note that a number of states require remote sellers to register and begin collecting sales tax on January 1, 2019. Additionally, some of these states have implemented different sales thresholds than South Dakota did.
In addition to the above jurisdictions, Tennessee previously enacted an economic nexus regulation that is not currently being enforced due to a court-ordered injunction resulting from a legal challenge. A number of other states, including Massachusetts, Ohio, Pennsylvania and Rhode Island, have previously enacted expanded sales tax nexus legislation that impacts filing requirements for remote sellers. These policies vary by state, and we are anticipating additional guidance from these states’ taxing authorities regarding sales tax collection implications for remote sellers. New York and a number of other states are still in the process of determining potential sales tax compliance requirements for remote sellers in their jurisdictions.
Tronconi Segarra & Associates will continue to track the latest state-by-state sales tax developments related to the Wayfair decision and will issue further advisories as additional states indicate how they will be addressing this unprecedented shift in sales tax compliance. For more information, please contact a member of our State and Local Tax team at 716.633.1373 or by email at .