It has been almost a year since the U.S. Supreme Court handed down its landmark decision in South Dakota v. Wayfair Inc. (June 2018) , making it easier for states across the country to enact nexus triggering legislation, and ultimately leading to the collection of sales tax from companies doing business in various states.
The Supreme Court’s ruling in June 2018 did not automatically make economic nexus the law of the land for all 50 states. The Court ruled that South Dakota’s economic nexus law was constitutional. (The state had enacted legislation which stated that 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 in the state within a year.) However, since this ruling, over 35 states have enacted similar economic nexus 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.,
CA Offers Clarity – Finally
California, one of the largest states in the country, has finally also clarified its position on economic nexus, and in the process has recently passed legislation to raise the threshold of sales required by out of state sellers to create economic nexus. As we previously reported, CA originally set its economic nexus threshold at $100,000 or 200 transactions. These thresholds went into effect on April 1. However, at the same time, legislation worked its way through the Assembly to raise those thresholds. Governor Gavin Newsom signed Assembly Bill (AB) 147 into law on April 25, which overrides the guidelines from the CDTFA regarding these thresholds. AB 147 has erased the 200 transactions threshold and has raised the sales dollar amount threshold to $500,000.
Read more about Assembly Bill (AB) 147 here.
Who is affected by this legislation?
With the enactment of AB 147, a retailer is considered to be doing business in California when they have sales of more than $500,000 of tangible personal property for delivery in California in either the current or prior calendar year. All sales of tangible personal property by a retailer or anyone related to the retailer must be combined to determine whether or not the $500,000 threshold is met.
A related person is defined as someone who‘s related to another as determined under the Internal Revenue Section 267(b) and includes relations both through business and family. The legislature’s intent in setting the $500,000 threshold is to avoid burdening small businesses by providing a threshold significantly above that stated in the Wayfair case.
Rules for Marketplace Facilitators
In addition, this law imposes a sales and use tax collection responsibility upon marketplace facilitators beginning October 1, 2019. Under this legislation, a marketplace facilitator is considered the seller and retailer for each sale facilitated through its marketplace, including sales by third-party or marketplace sellers. This is a change from the historical view, which required the individual seller to be responsible for collection of sales tax.
For purposes of the $500,000 threshold, a marketplace facilitator would count all sales of tangible personal property made through its marketplace for delivery into California including both the seller’s own product sales and those sales of products facilitated through its marketplace. The law provides some relief of liabilities to marketplace facilitators in certain limited situations.
The marketplace facilitator provisions apply to marketplaces such as Amazon Etsy, eBay, and other such sales platforms. Sales platforms such as these will be required to collect and report sales tax on behalf of those vendors who sell through their platform. This may provide some interesting business challenges and discussions between the seller and the marketplace facilitator as far as pricing, profits, mark-up, etc.
Is it Fair to Instate Retailers?
A key component behind AB 147 was to offer some relief to out of state retailers selling into California by raising the threshold from $100,000 (like the much smaller state of South Dakota) to $500,000 (also in line with larger states like Texas And we believe it does do that. However, small businesses located in California (who have to register, collect and remit after just a couple of retail sales) might argue that the break for out of state retailers is discriminatory to instate businesses.
We’re here to help!
Due to the complexities surrounding California’s economic nexus legislation, 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 other states – there are only a few left that haven’t yet addressed the issue! We are here to help with all of your multistate tax needs!
