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California’s tax department is leaning toward following South Dakota’s law in a forthcoming notice directing online retailers to begin collecting and remitting sales tax on out-of-state sales as soon as next year.
The move could set up a race with the Legislature, which may be inclined to pass a bill with higher sales thresholds than those specified for South Dakota as part of the pivotal U.S. Supreme Court ruling in South Dakota v. Wayfair.
The department plans to issue a notice to taxpayers by the end of the calendar year, with a compliance deadline in early 2019, Department of Tax and Fee Administration Director Nicolas Maduros told lawmakers Oct. 15.
“Our plan is to follow up with regulations both to help us internally and to potentially fill in some gaps, but the law is out there, and it’s on the books, and I think we believe we can proceed with notice to require people to comply,” Maduros said during a joint meeting of the Assembly Committee on Revenue and Taxation and the Senate Governance and Finance Committee.
California loses about $1.5 billion a year in uncollected sales and use tax from online sales, according to the CDTFA.
The Supreme Court’s June 21 Wayfair ruling canned Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law requiring remote sellers to collect sales tax if they had more than $100,000 in in-state sales or 200 transactions would pass constitutional muster.
Since the Wayfair ruling, dozens of states are passing versions of South Dakota’s law or enforcing existing nexus laws and rules they already have on the books. Many states are also rushing to impose duties on marketplace facilitators such as Amazon.com Inc., eBay Inc., and Etsy Inc. that host sellers on their sales platforms.
CDTFA hasn’t settled on exact terms of the notice but will likely specify that if a retailer has a certain threshold of sales in the state in the preceding 12 months, it must comply with sales and use tax obligations prospectively from the compliance date, Maduros said. The department will take suggestions from stakeholders at a public meeting Oct. 24 at its headquarters in Sacramento before issuing the notice, he said.
Assemblywoman Autumn Burke (D) and Sen. Mike McGuire (D), who co-chaired the hearing, seemed alarmed when Maduros said the notice could set the tax obligation thresholds at $100,000 in annual sales or 200 annual transactions. Lawmakers may enact a different standard in 2019, but if the department acts first, it would be confusing for retailers, McGuire and Burke said.
If the Legislature acts, it would likely consider thresholds higher than those in South Dakota to reflect the relative size of the state. California has 40 times as many residents as South Dakota’s 1 million residents, and a much larger market.
“What is the urgency to put the notice out?” Burke asked.
“Our urgency is simply that there is a statute on the books in California, and my job as I see it is to implement the laws of California,” Maduros said.
Maduros was referring to California’s 2012 online sales tax law, which has a “long-arm” provision that imposes a duty to collect use tax on retailers with substantial nexus in the state to the extent allowed under the U.S. Constitution’s commerce clause.
If it could legislate the rules, the CDTFA would propose a higher revenue threshold without a threshold number of transactions, and a requirement that marketplace platforms collect and remit tax on behalf of sellers, Maduros said. His description of a potential legislative proposal is similar to one obtained by Bloomberg Tax in August that appeared to come from the administration of Gov. Jerry Brown (D).
“We purposefully waited a bit to see if that would occur,” Maduros said.
Lawmakers didn’t enact a bill before adjourning for the year Aug. 31, and will reconvene for a new session in December.
Crutchfield Corp., an online retailer for consumer electronics and automotive parts based in Charlottesville, Va., says Massachusetts has argued both that Wayfair applies, and that it doesn’t apply, when trying to determine how far back an online retailer should have collected the state’s sales tax.
The company sued the Massachusetts Department of Revenue in a Virginia court in October 2017 over the state’s “cookie nexus” regulation, which requires online vendors to collect state sales tax if they have property interests in or use in-state apps and cookies.
Most states are using dates after the Supreme Court’s June 21 Wayfair decision as their starting point. Massachusetts set October 2017 as the enforcement date of its cookie nexus regulation, which the state says is unaffected by the ruling.
But Massachusetts has also argued that Wayfair does apply, Crutchfield said in an Oct. 12 brief filed by Matthew Schaefer of Brann & Isaacson, the same firm representing Wayfair in the South Dakota case and in similar cases in other states.
The Massachusetts commissioner of revenue “first asserts that Wayfair applies to all tax periods, both before and after the date of the court’s Wayfair decision in June 2018,” the Oct. 12 brief says, referring to a Sept. 28 DOR brief in the case. “He then asserts that because Massachusetts’ pre-Wayfair sales tax demands against remote sellers are limited to periods after October 2017 (nine months prior to Wayfair), when the Internet Vendor Rule took effect, there is no retroactive application of Wayfair.”
The department didn’t respond to a request for comment.
Crutchfield alleges in its lawsuit that the regulation creates an undue burden on interstate commerce, is preempted by the Internet Tax Freedom Act, and violates restraints on state authority under the federal dormant commerce clause as interpreted by the U.S. Supreme Court in Quill.
Utah passed a South Dakota-style economic nexus bill (S.B. 2001) during a special session in July, but didn’t address online marketplaces such as Amazon.com Inc., Etsy Inc., and eBay Inc.
For that reason, the Utah Legislature will likely consider a marketplace facilitator bill in its 2019 session, which begins Jan. 28, John Valentine, chairman of the Utah State Tax Commission, told Bloomberg Tax Oct. 12. The bill will likely require facilitators—platforms that offer products of third-party sellers, then typically facilitate payments and delivery—to collect and remit taxes when triggering thresholds are met.
Utah’s remote sales bill copycats South Dakota, with the same collect-and-remit triggers for out-of-state sellers—$100,000 in annual sales or 200 transactions to Utah buyers. The requirements are to take effect Jan. 1, 2019.
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