The most important thing to happen in the sales tax world in recent memory is the U.S. Supreme Court’s June 2018 ruling in South Dakota v. Wayfair and how states are now reacting to the high court’s decision. This ruling overturned the Supreme Court’s 1992 decision in Quill Corp v. North Dakota, 504 U.S. 298 (1992), which established a physical presence standard before a state could enforce sales tax collection responsibilities on a seller. With the Wayfair decision, the Supreme Court effectively ruled that instead of just physical presence, another indicator of sufficient presence in a state is “economic nexus”. Essentially that means that a certain dollar volume and/or number of transactions in a state can create nexus and therefore a responsibility on the seller to collect and remit sales tax. In the South Dakota statute, those amounts are sales to the state in excess of $100,000 or 200 transactions within a year. For more information on this decision and the key facts of the case, please see one of my previous blogs. (https://www.milesconsultinggroup.com/blog/2018/08/21/economic-nexus-in-the-wake-of-the-wayfair-decision/#more-1891)
Since the high court’s ruling in June, about 30 states have jumped on the economic nexus bandwagon in some form. Many of these states are part of the Streamlined Sales Tax Project (SSTP). SSTP member states have standardized aspects of sales and use tax to reduce administrative and compliance costs for businesses which, in theory, makes compliance easier for businesses selling to customers in those states. California has been late to the table in addressing its position about economic legislation. Note that California is not a member of the SSTP.
A Recent Informational Session
On October 24, 2018, the California Department of Tax and Fee Administration (“CDTFA”) held a short informational session on the impact of the Wayfair decision on out of state sellers selling into California. The purpose of this meeting was for the CDTFA to unveil what their new policy may look like and also to take comments, questions and suggestions from audience members, mostly comprised of business owners and other interested parties.
California has a statute in place which would, theoretically, already allow for enforcement of an economic nexus standard. California Revenue and Taxation Code §6203(c) indicates that a “retailer engaged in business in this state” means “any retailer that has substantial nexus with this state for purposes of the commerce clause of the US Constitution”. The 1992 Quill case had interpreted substantial nexus to mean a substantial physical presence. But in the recent Wayfair case the US Supreme Court held the physical presence rule of Quill to be “unsound and incorrect”. So, now, effectively §6203(c) will rely on the holding in Wayfair, which considers transactional or economic nexus to be the commerce clause interpretation.
So, could California require companies meeting the South Dakota thresholds ($100,000 of sales OR 200 transactions) to register and file in the state? The CDTFA believes it could. However, no enforcement action has been announced yet. Why? One likely reason is that California is not a member of the SSTP (as mentioned above) and that makes immediate enforcement problematic. Three of the key aspects that the Supreme Court highlighted in its decision in Wayfair as “preventing discrimination against or undue burdens upon interstate commerce” are:
- A safe harbor for small sellers (in South Dakota, that’s the $100,000 or 200 transaction limit; California would also likely enact those or higher limits)
- No retroactive enforcement
- Membership in the Streamlined Sales and Use Tax Agreement (this is key because it requires state-level tax administration, uniform definitions for products and services, simplified rate structures and providing sellers with access to compliance – none of which currently apply to California)
As long as the third prong is not met, California could be subject to legal challenges if it enforced the current statute as written.
Observers are hopeful that due to the size of the state (40 million people in California, versus 1 million in South Dakota), consideration would be given to increasing the threshold to at least $500,000 in sales and also a higher minimum number of transactions before the economic nexus rules would kick in. During the informational session however, the CDTFA representative indicated that the agency doesn’t have the authority to choose a threshold that differs from the one dictated in the Wayfair case. That decision must be made through the state legislature. We are hopeful that the legislature will take a hard look at enacting more reasonable thresholds for our large state.
If you are a business that already has operations in California, it’s business as usual. And, if you are an out of state seller with no physical presence nexus in the state, there is currently no enforced filing requirement. We anticipate more guidance in the new year when the legislature comes back into session.
That said, right now would be a good time to begin considering the following items:
- Evaluate the volume of sales to California customers;
- Examine the taxability of your products. California’s rules on taxability often differ from other states and it is important to remember that not all states apply sales tax uniformly to all products and services. California has many interesting nuances;
- Think about implementing an automated reporting and compliance system. If you’re a multi-state seller, you’ve probably already begun to file in many states. Be ready to add California in early 2019 (exact date TBD), which will include correctly reporting the district sales tax portion as well.
- Stay up to date with economic nexus legislation in California and other states, here in this forum and also at our company blog: https://www.milesconsultinggroup.com/blog/category/wayfair/
Other recent “California (CA)” posts by Monika Miles, CPA:
- Wayfair and California – Where Are We?
- Technology Companies and the California Partial Sales Tax Exemption
- Reminder: California Manufacturers' Sales Tax Exemption
- CA Board of Equalization: Changes to Sales-Use Tax Administration
- SaaS Taxation in California - An Overview