Client Alert

California Update Regarding Implementation of Sales and Use Tax Collection Requirement After Wayfair

08 Nov 2018

On October 24, 2018, the California Department of Tax and Fee Administration (CDTFA), including Director Nick Maduros, held a meeting for taxpayers and stakeholders to discuss implementation of the California sales and use tax collection requirement based on the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) to overturn the physical presence nexus requirement in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

Under California law, every retailer engaged in business in California and making taxable sales of tangible personal property for storage, use, or other consumption in California is required to collect sales and use tax from the purchaser at the time of sale. Cal. Rev. & Tax. Code § 6203(a). A retailer is engaged in business in California if it has substantial nexus with California for purposes of the Commerce Clause of the U.S. Constitution to the extent that federal law permits the state to impose a collection duty. Id. § 6203(c).

While various legislative proposals to implement a non-physical-presence-based nexus standard for California sales and use tax purposes have been considered, the California Legislature has not introduced or enacted any legislation. As such, the CDTFA plans to issue notice of a remote seller collection standard without legislative action based on its authority and duty to administer the nexus standard provided in Section 6203, which extends to the limits of the Commerce Clause.

At the meeting, CDTFA officials stated that the taxing authority plans to implement a sales and use tax collection requirement in early 2019 based on a threshold level of sales or transactions during 2018. While the CDTFA did not provide information regarding the exact threshold, previous proposals have considered different thresholds of either $100,000 or $500,000 of sales or 200 transactions. The CDTFA did not provide the expected date that collection would be required, but stated that it would not seek to apply the standard retroactively and would give remote sellers adequate advance notice before requiring compliance.

The CDFTA indicated that it does not expect to hold another stakeholder meeting prior to issuing the notice regarding the new collection requirement. If it issues such a notice without legislative or regulatory action, the nexus standard is potentially subject to challenge on various bases, including the burden on interstate commerce to comply with the sales and transaction thresholds for numerous local tax districts, as a tax increase without a supermajority approval by the California Legislature, and for failure to comply with the California Administrative Procedures Act.

Out of state retailers making sales into California should continue to monitor the progress of the CDTFA’s implementation of the new sales and use tax nexus standard and any legislative or regulatory developments regarding this issue.

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