The California Department of Tax and Fee Administration (CDTFA) announced recently in Special Notice L-565 that, beginning April 1, 2019, a retailer located outside of California is required to collect use tax if, during the preceding or current year:
- The retailer’s sales into California exceed $100,000, or
- The retailer made sales into California in 200 or more separate transactions.
The CDTFA stated that the above thresholds are consistent with the U.S. Supreme Court’s decision in South Dakota v. Wayfair (Dock. No. 17-494) and deem an out-of-state retailer to be doing business in California pursuant to Revenue and Taxation Code section 6203. As such, out-of-state retailers “engaged in business in California” are required to collect California use tax from their customers on the retailer’s taxable sales of tangible personal property into California and remit the tax to the CDTFA.
The new collection and filing requirements are not retroactive and apply only to sales made on and after April 1, 2019. However, the requirements to register and collect California sales and use tax prior to the Wayfair ruling remain in effect. This means that retailers with a physical presence in California – by way of sales representatives, inventory, offices or other means – may have sales or use tax exposure for current and preceding years due to rules already in place.
An additional notice was issued to address the district portion of the California sales and use tax (Special Notice L-591). The thresholds are similar to the state amounts; however, the collection requirement is specific to the district if the thresholds are met. This means that retailers are considered engaged in business in a given district if sales exceed $100,000 or 200 transactions, separately from the state nexus standard. Businesses will likely meet the state threshold and may only meet select district thresholds depending where their sales are located.
We recommend that out-of-state retailers review their activity and sales into California with consideration of these new rules. Please reach out to Akash Sehgal or Frances Ellington in our State and Local Tax practice if you have any questions on the new California economic nexus standards.