Ever since the Wayfair ruling by the Supreme Court in June 2018 opened up the ability for states to impose sales tax liability on remote sellers, states have been leaping into the “economic nexus” pool like a series of synchronized divers. And on December 11, the elephant by the pool made its splash.
On December 11, 2018, the California Department of Tax and Fee Administration published a news release indicating that the state will soon extend its sales tax nexus rules to include remote sellers who reach certain thresholds in annual sales. About 30 other states have already passed such rules, but California’s entry will make the most waves by far.
This article on the main Sovos feed provides further background and explanation for what California is doing; below is a less-detailed look at what is happening in California’s Notice.
It must be noted that the Notice did not come with a set of formalized rules — those must wait for future days as the Golden State determines how exactly to administer these new taxes. But there are some things we do know now:
- The requirement for remote sellers to collect and remit tax will take effect on April 1, 2019.
- Remote sellers will only be required to collect and remit tax if they exceed these thresholds:
- $100,000 in annual sales; or
- 200 separate transactions.
- These are identical to what most other states are enacting; but due to the size of the California market, it is likely that many sellers will quickly reach them.
- These requirements for remote sellers will only apply to prospective sales (i.e. those made after the effective date), and not retroactively.
- 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%).
- In addition, remote sellers will be required to collect district taxes.
That last point raises a matter of complication for remote sellers with a newfound tax liability in California. 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.
This District by District determination will certainly present a complication as the state proceeds, a complication that other states with particular local tax rules, like Louisiana and Colorado, have found limits their ability to establish economic nexus rules.
However, there are ways that the state can, and does, mitigate the pain caused by these complications. And it is certainly possible that more legislation and regulation will come down in the next few months to further smooth out the wrinkles.
As things in California develop, and as other states establish economic nexus rules, we will make sure to keep you informed, so stay tuned to the Taxify and Sovos blog feeds to keep up to date with what is happening.
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