California Passes Sales and Use Tax Legislation

| 5/30/2019
On April 25, 2019, California Gov. Gavin Newsom signed into law Assembly Bill (AB) 147, which is legislation on remote seller and marketplace facilitator sales and use tax.

AB 147 modifies California’s sales and use tax economic nexus provisions for remote sellers without a physical presence in the state and establishes marketplace collection requirements. It has a $500,000 threshold for sales of tangible personal property, regardless of the number of sales transactions within California. Under the new law, out-of-state retailers and related parties making more than $500,000 of total combined sales from tangible personal property for delivery into California will be required to collect and remit sales and use tax based on a retroactive effective date of April 1, 2019.

The legislation replaces the administrative guidance issued by the California Department of Tax and Fee Administration (CDTFA), which had imposed a threshold of $100,000 of sales or 200 transactions, effective April 1, 2019. Retailers will be required to collect local district tax based on the tax rate in the destination district rather than requiring nexus with each district as provided under prior law.

In addition, effective Oct. 1, 2019, marketplace facilitators will be required to collect and remit California sales and use tax on California sales made by their third-party marketplace sellers if the marketplace facilitator has California sales and use tax nexus based on a physical presence within California or meets the new $500,000 sales threshold based on a combination of its own sales and the sales of its third-party marketplace sellers.

The legislation includes a temporary provision to grant relief to certain businesses. Specifically, penalties and interest assessed against a retailer may be waived by the CDTFA for tax periods beginning April 1, 2019, through Dec. 31, 2022, when the total sales of tangible personal property into California is $1 million or less if the retailer registers and was not required to be registered under prior law.

Upon passage of AB 147, the CDTFA issued Special Notice L-632, which provides that retailers must adhere to both of the following:
  • Retailers located outside of California (remote sellers) must register with the CDTFA and collect California use tax if, in the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer exceeded $500,000.
  • All retailers, whether located inside or outside of California, are required to be registered with the CDTFA and to collect and pay the CDTFA district use tax on all sales made for delivery in any district that imposes a district tax if in the preceding or current calendar year the total combined sales of tangible personal property sold in the state for delivery in the state by the retailer and all persons related to the retailer exceeded $500,000.

The new collection requirements are in effect as of April 1, 2019, and supersede previous direction regarding the use tax collection requirements for out-of-state retailers (see Special Notice L-565) and the district use tax collection requirements for all retailers, including retailers located inside or outside of California.

Special Notice L-632 also advises that remote sellers that registered with the CDTFA under the CDTFA’s prior direction (Special Notice L-565 ) and that 1) do not meet the new $500,000 sales threshold pursuant to AB 147, and 2) do not have any contacts with California that would make them a retailer engaged in business in California, may either close their account or continue to collect the use tax as a courtesy to their California customers. It also advises that any use tax collected by remote sellers from California customers must be reported and paid to the CDTFA.

Looking forward

California joins other states that recently implemented an economic nexus standard along with a marketplace facilitator filing requirement for sales and use tax collection. Companies should review their sales volumes to determine if the new sales tax collection requirements would apply to them. In addition, companies, even those that currently are filing in California, should consider the district tax changes, as the changes might require adjustment to their procedures for determining tax rates that reflect new destination-based rate rules.
 

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