California Enacts Sales Tax Legislation Aimed at Remote Sellers and Marketplace Facilitators
In June 2018, the U.S. Supreme Court overturned 27 years of legal precedent holding that no state could require an out-of-state retailer to collect sales or use taxes from purchasers absent the retailer having a physical presence in that state. In South Dakota v. Wayfair, the Court upheld a South Dakota statute that required remote sellers to collect sales tax on retail sales of tangible personal property to customers in that state if, absent any physical connection to the state, the seller 1) had in excess of $100,000 in sales in the state in the prior or current year, or 2) sold tangible personal property for delivery in the state through 200 or more transactions. In so doing, the Court replaced the former bright-line “physical presence” standard of nexus for imposing sales taxes under the Commerce Clause of the U.S. Constitution with a not-yet-fully-defined “economic nexus” standard (although physical presence could arguably still be an additional basis for imposing nexus on remote sellers).
Following the Court’s decision, states rushed to pass legislation or adopt rules allowing them to take advantage of the new sales tax nexus threshold. Unsurprisingly, the adoption of economic activity standards hasn't been uniform, with some states imposing minimum sales standards higher or lower than the South Dakota statute at issue in Wayfair and with different implementation dates, some of them retroactive. For example, Georgia recently lowered its nexus threshold to $100,000 in gross sales in the state, effective Jan. 1, 2020. Meanwhile, Alabama adopted a $250,000 gross sales test, effective October 2018. Many states haven't yet weighed in on the matter, creating significant uncertainty and complexity for remote sellers.
California’s Recent Economic Nexus Standard Law
Recently, California enacted legislation adopting an economic nexus standard for sales taxes (Cal. AB 147). Under the new law, which is retroactive to April 1, 2019, remote sellers may be required to collect sales taxes if they exceed $500,000 in gross sales from products delivered into the state in the prior or current tax year. Unlike the South Dakota legislation at issue in Wayfair, California did not include a transactional test.
The adoption of a higher gross receipts threshold and the abandonment of a transactional test by California arguably reflect a growing realization by tax policymakers that the $100,000/200 transaction test upheld in Wayfair may not adequately protect small, interstate businesses from local entanglements, which was the original purpose of the Commercial Clause. This is especially the case because the gross receipts threshold in Wayfair was based on gross sales in the state and not necessarily taxable sales.
While providing some relief to small businesses, the California legislation expanded the scope of the state’s powers by creating new sales tax collection responsibilities for marketplace facilitators, including Amazon.com and Wayfair. Under the legislation, a “marketplace facilitator” is defined as someone who 1) operates a “marketplace” (whether physical or virtual) where “marketplace sellers” can sell products for delivery into the state, and 2) who contracts with such marketplace sellers to facilitate sales for some consideration or remuneration. Facilitators are subject to sales tax collection responsibilities for their own sales into the state, as well as the sales of sellers using their marketplace. In effect, the marketplace facilitator is treated as the retailer making the sale into the state for both their own and their marketplace sellers’ sales. If a marketplace facilitator fails to do so, this doesn't relieve the marketplace seller of responsibility for collecting California sales taxes if the seller was otherwise required to do so under the new nexus standards.
Key Steps for Retailer to Take
Retailers selling products into California and other states that have adopted similar legislation, whether directly or through marketplace facilitators, can take several steps to protect themselves in this new environment.
- Sellers should work with their tax providers to determine which states have adopted economic nexus standards for sales taxes following the Wayfair decision and the effective date of such provisions. Other states have enacted use tax reporting standards requiring remote sellers that do not register to collect sales taxes to send their customers in the state notices regarding their potential use tax liability. Failure to comply with these requirements subject the seller to stiff penalties.
- Sellers need to determine their potential prior period tax liability, if any, including periods prior to the adoption of the new sales tax nexus standards. In the event there's prior period liability, it may be difficult for the seller to comply prospectively with the new rules without having to disclose the prior period liability, as most state registration forms require a statement, under penalty of perjury, of when the seller became liable for tax collection in the state. Fortunately, voluntary disclosure agreements may mitigate prior period liability and the problem of disclosure in trying to comply prospectively. Most states allow taxpayers to come forward, anonymously at first, to negotiate limits on prior period exposure and allow for the waiver of penalties.
- Sellers should communicate with their marketplace facilitators to determine the states in which the facilitator will be collecting sales tax on behalf of marketplace sellers. Once again, the existence of a marketplace facilitator statute may not relieve the seller of liability if the facilitator fails to collect the proper amount of taxes.
- Sellers need to monitor developments in this area as more states adopt and then potentially change their economic nexus standards of taxability for sales taxes in the coming months.
- Sellers should consider automating their sales tax compliance through a software or software-as-a-service (SaaS) solution.
The adoption of the higher nexus threshold by one of the largest markets in the country, and the lack of state uniformity so far, is evidence that the Wayfair decision may have opened a Pandora’s Box of issues for interstate commerce that have yet to be even discovered.
Peter G. Stathopoulos is a partner and leads Bennett Thrasher’s State and Local Tax practice, a state and local tax advisory firm.
Peter G. Stathopoulos is a partner and leads Bennett Thrasher’s State and Local Tax practice. He has been practicing in the area of state and local taxation and economic development incentives for more than 20 years. He may be reached at firstname.lastname@example.org.