In South Dakota v. Wayfair, the United States Supreme Court ruled physical presence is no longer required for a state to require a seller to collect sales tax. States can freely require a seller to collect sales tax if the seller sells a certain dollar amount of sales into the state or a minimum number of transactions. This requirement is called economic nexus. Since the ruling, our firm has noticed many states seizing on this newfound opportunity.
California is the latest state to join the ranks of states imposing economic nexus. It has been long-thought California would implement economic nexus. The question has been when California would announce it.
Effective April 1, 2019, California will require an out-of-state seller, who meets one of two criteria, to collect California sales tax on sales into the state. California Special Notice, December 2018. The first criterion is if the seller has sales into California exceeding $100,000. The notice does not say whether this first threshold is gross sales or, perhaps, gross sales minus certain charges, such as shipping. Until California comes out with more guidance, the conservative approach would be to assume the threshold is for gross sales into the state. The second criterion is if the seller has made two hundred or more separate sales (called transactions) into the state. Based on this second criterion and for example, if I have an Etsy shop and sell $10 bracelets with free shipping, I will be required to collect sales tax to my California customers if I have 200 separate transactions into the state. In other words, I will have $2,000 of sales into the state but be required to collect sales tax nonetheless.
In its Special Notice, California makes it clear the requirement is not retroactive. Specifically, the requirement applies only to sales starting on and after April 1, 2019. The prospective application is a fairness issue and will help to limit the exposure of some sellers. The state does give sellers the option to register for and collect sales tax beginning before the April 1st deadline.
Going forward, sellers must be aware of the California state sales tax rate, which is currently at 7.25%. However, the rate may be higher in certain areas of the state. Sellers will need to recognize a potential requirement to collect a higher rate; otherwise, sellers may face being assessed for failing to collect the higher rate.
California has not finalized its requirements for out-of-state sellers. These requirements will begin to be formulated as the deadline comes closer.
Nevertheless, unintended consequences may arise for out-of-state sellers as they register with California for sales tax purposes. One consequence may be the requirements to register for and pay other tax types. For instance, the seller may be subject to an income tax, assuming the seller does not meet the protections of a federal law. Before registering, sellers must carefully consider the tax types they will be responsible for and build these taxes into their business model. Otherwise, sellers may be priced out of the market.
In conclusion, businesses should carefully analyze their sales into California and other states to determine whether a requirement to collect sales tax will be met. With proper planning over the next several months, your business can mitigate upcoming costly surprises.
Texas Jumps on the Economic Nexus Bandwagon, published November 22, 2018, by David J. Brennan, Jr., Esq.
Sales Tax Danger for FBA Users, published November 20, 2018, by Jerry Donnini, Esq.
Ready for a Quiet Fall? Not Quite So Fast…, published November 14, 2018, by David J. Brennan, Jr., Esq.
Nevada Economic Nexus Thresholds Go into Effect November 1, 2018, published October 16, 2018, by Jeanette Moffa, Esq.
South Carolina Issues Economic Nexus Guidance for Remote Sellers, published October 15, 2018, by Jeanette Moffa, Esq.
Wyoming Issues Guidance for Remote Sellers Following Wayfair, published October 14, 2018, by Jeanette Moffa, Esq.
Wayfair Puts Quill’s Physical Presence Test for Sales and Use Tax Collection to Bed, published June 26, 2018, by Jerry Donnini, Esq.
About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is sales tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. David worked for the Florida Department of Revenue as a Senior Attorney before entering private practice. You can read his BIO HERE.