California Online Sales Tax Rules Start Aug. 1: Unofficial Draft

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Laura Mahoney

California’s tax department inadvertently posted draft tax collection rules for online retailers on its website that indicate the state may copy South Dakota’s law beginning Aug. 1.

In the document, obtained by Bloomberg Tax, the California Department of Tax and Fee Administration said retailers must register and collect tax if they met certain thresholds during the current or previous calendar year as a result of the U.S. Supreme Court’s ruling in South Dakota v. Wayfair. The draft document is no longer posted.

The thresholds of $100,000 in sales or 200 transactions annually for delivery to California customers mirror South Dakota’s law, which the court strongly suggested would pass constitutional muster. The June 21 Wayfairruling—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales—has many states looking to expand their authority over online sales taxation.

Unofficial, Inadvertent

In a prepared statement, a CDTFA spokesman told Bloomberg Tax the posting of the draft document was an error. The department hasn’t issued its official guidance yet in response to Wayfair.

“[W]hat you obtained was an unofficial internal-only document that was inadvertently placed on our test website,” spokesman Paul Cambra said. “It was a draft written prior to the Supreme Court ruling and was not for publication or public distribution. Now that the court has issued its ruling, CDTFA is currently evaluating the next steps in a thoughtful manner that supports California taxpayers.”

The document was downloaded from the CDTFA’s website June 22, according to a time stamp. It has been circulated among some tax practitioners in California.

“As a result of the Wayfair decision, a retailer may now have a substantial nexus with California without having a physical presence in this state,” the document said. “Also, federal law now permits California to begin requiring retailers to collect use tax if the retailers have similar levels of sales activity in this state as those in the South Dakota law, regardless of whether they have a physical presence in California, and, as provided above, the CDTFA will require such retailers to collect California use tax, beginning August 1, 2018.”

2012 State Law

The CDTFA’s position hinges on provisions in a 2012 state law that says a retailer engaged in business in the state “means any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.”

California lawmakers included the long-arm provisions with an eye toward eventual action in Congress or the courts to overturn Quill. In its 5-4 Wayfair ruling, the court stopped short of formally declaring South Dakota’s law valid in the absence of Quill, and the South Dakota Supreme Court still has to bless the state’s economic nexus model before it can become effective. It’s expected to do so in mid-August.

The department may be vulnerable to legal challenges if it doesn’t issue regulations and only issues its final policy in notice form, Carley Roberts, an attorney with Pillsbury Winthrop Shaw Pittman LLP in Sacramento, told Bloomberg Tax. Regulations are needed to set a uniform policy of general application, she said.

“What really struck me is that they’re just going to say it,” Roberts said.

Thresholds Too Low

Thresholds for nexus in the draft are encouraging, but the thresholds from the South Dakota law are too low, Eric Miethke, president and CEO of Capitol Law and Policy Inc., told Bloomberg Tax. The CDTFA should consider higher thresholds to reflect California’s size.

Although the draft points out that the statewide sales and use tax rate is 7.25 percent, it doesn’t address whether out-of-state online retailers must collect that amount, or the higher amounts set in many California jurisdictions, he said. Many cities and counties have added incremental taxes to the state base for specific purposes.

The draft also isn’t clear on the issue of retroactivity, Miethke said. Although the CDTFA draft would set the Aug. 1 date for registration and collection, it doesn’t specifically say whether the department will only look forward, or will go back to collect tax from retailers to the extent allowed under the statute of limitations, he said.

Old Rules Still Apply

In the draft document, the CDTFA reminds retailers that the decision doesn’t change the rules for those retailers required to collect California use tax before the Wayfair ruling.

Under the law, online retailers have been required to collect and remit use tax if they have affiliates who sell at least $10,000 in merchandise a year through referrals to sales platforms such as Amazon.com Inc. through links or ads, and if they sell at least $1 million a year in merchandise to California residents. They also must collect and remit if a member of their corporate group is in the state.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at lmahoney@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State