Breaking news: Assembly Bill 147 has been passed by the CA state legislature and signed by the Governor on April 25, 2019, that eliminates the transaction threshold and raises the sales threshold from $100,000 to $500,000. For more information on this new legislation, click here to view our latest blog.
It’s been over 9 months since the U.S. Supreme Court handed down its landmark decision in South Dakota v. Wayfair Inc., which made it easier for states to enact nexus triggering legislation, leading ultimately to the collection of sales tax revenue from companies doing business in the state.
The Supreme Court’s ruling in June 2018 did not automatically make economic nexus the law of the land for all 50 states. The high court’s decision was that South Dakota’s economic nexus law was constitutional. Since this ruling, states have been jumping on the economic nexus bandwagon by enacting similar legislation. As we describe in a recent blog, economic nexus is based upon the amount of sales or number of transactions in the state. If a certain threshold is met, nexus is deemed to be created. For instance in South Dakota, economic nexus is created in if an out of state company makes sales of products or services into South Dakota in excess of $100,000 or has 200 or more transactions.
CA Jumps on Board
There has been a flurry of activity among states enacting economic nexus laws as a result of this Supreme Court case. California is the latest state to officially jump on board the economic nexus bandwagon and effective April 1, 2019 out of state sellers meeting certain thresholds must now collect and remit sales tax.
As outlined in the article by Avalara, the California Department of Tax and Fee Administration (CDTFA) reminds taxpayers that this law does not represent a tax increase or a new tax law. The CDTFA is merely enforcing an existing sales and use tax law as permitted by the Wayfair case.
The CDTFA’s guidance closely emulated the South Dakota economic nexus law, which triggered the Wayfair decision. Although CA is not a member of the Streamlined Sales Tax Agreement (SST), the CDTFA adopted South Dakota’s small seller exception and is prohibiting retroactive enforcement of economic nexus. These guidelines are similar to the law enacted by South Dakota, which is a member of the SST.
As such, California effectively says that out of state businesses meeting either of the following thresholds in the current or previous calendar year are required to register with the CDTFA and collect and remit sales tax to the state:
- The retailer’s sales into the state exceed $100,000, OR
- The retailer made sales into the state in 200 or more separate transactions.
How Does it Impact In-State Sellers?
Current law requires in-state businesses to collect and remit the full state and district rate in cities in which it has nexus. Therefore, a business located in San Jose might correctly collect only the state sales tax on sales made to a consumer in San Francisco, but not the city’s local or district taxes because the business doesn’t have nexus in San Francisco. (Note that many retailers do already collect the entire amount as a “courtesy” to their customers because otherwise the consumer still owes the remainder and would have to self-remit it.)
Starting April 1, 2019, a California business meeting either of the following thresholds in each different district in the current or previous calendar year must collect and the remit the applicable district tax (it is no longer an option).
- The retailer’s sales into the district exceed $100,000, OR
- The retailer made sales into the district in 200 or more separate transactions
As with out-state sellers, in-state sellers may voluntarily collect district taxes in districts where their sales are under the threshold.
A New Bill?
Considering California’s population and the fact that many more businesses make sales into CA than South Dakota, it has been debated whether CA would be willing to create a higher sales threshold before requiring companies to begin collecting and filing. The CDTFA said that it lacked the authority to stray far from the South Dakota economic nexus law. The CA legislature is currently considering a measure to:
- Eliminate CA’s existing affiliate and click-through nexus policy
- Eliminate the transactions threshold for economic nexus
- Increase the sales threshold for economic nexus to $500,000
- Require marketplace facilitators to collect and remit tax on third-party sales in the state.
This is all explained in Assembly Bill (AB) 147.
There is no guarantee that this bill will pass and it is still working its way through the Legislature. It hasn’t even made its way to Governor Gavin Newsom’s desk yet.
We’re here to help!
California is a popular state in which to do business (and is the home state of Miles Consulting Group!), and in response to the Wayfair decision, it is a state that has held back from enacting economic nexus legislation, until now. California has now come onboard with economic nexus enforcement, but we are still waiting to see if AB 147 will pass and alter these rules.
Due to the complexities surrounding the U.S. Supreme Court Decision, it is helpful to consult with tax professionals, like Miles Consulting Group, to assist you. Stay tuned to our future blogs for further information on the enactment of the economic legislation in California and other states. We are here to help with all of your multistate tax needs!
