This article is reproduced with permission from Spidell Publishing, Inc.
The Governor has signed AB 147, which increases California’s use tax economic nexus threshold to $500,000 of sales of tangible personal property in California, effective April 1, 2019.
The California Department of Tax and Fee Administration (CDTFA) previously announced that it would begin enforcing the Wayfair economic nexus threshold of $100,000 of sales or 200 transactions, effective April 1, 2019, but AB 147 supersedes the CDTFA’s threshold.
AB 147 brings welcome relief to some small California businesses because:
- the $500,000 threshold means that a greater number of small businesses are not required to comply with an increased district tax collection and reporting requirements (unless, of course, they have a physical nexus in the district);
- it does not contain a transactional threshold, so sellers without physical nexus in a district can make an unlimited number of sales without having to collect district taxes as long as its total California sales are below $500,001; and
- it shifts much of the collection requirements to marketplace facilitators such as Amazon.
To view the full text of the bill, go to:
AB 147 does not contain a transactional threshold, so a seller could make an unlimited number of transactions and would only be required to file and collect if the total sales are $500,000 or more.
Physical presence standard still applies
The current nexus status continues to apply. Therefore, if a California business has physical presence in a district, all sales delivered to customers in that district will be subject to the district tax even if it does not meet the $500,000 threshold.
California rejects $100,000 / 200 transaction threshold
Since AB 147 is now enacted, the CDTFA’s $100,000 or 200 transaction thresholds will not go into effect. This means sellers with sales below the $500,000 threshold would not see their California use tax collection responsibilities increase.
The $100,000/200 transaction threshold was upheld by the U.S. Supreme Court in South Dakota v. Wayfair and has not been adopted by the majority of states. Sellers selling into the states that have adopted the $100,000/200 transaction threshold must register and collect those states’ use taxes.
See Spidell’s 50-state chart showing the states’ latest nexus standard at:
However, starting October 1, 2019, if a seller sells its goods over a marketplace such as Amazon, the marketplace facilitator (e.g., Amazon), and not the seller, would be required to collect and remit the sales and use taxes if the marketplace facilitator meets the $500,000 California sales threshold for all of its sales (both on its own behalf and for nonrelated sellers making sales via the marketplace). Please be cautious that as a result of the October 1, 2019, operative date for the marketplace facilitator provisions, sellers may be liable for state and district use taxes on all of their sales (even if made via a marketplace) between April 1, 2019, and October 1, 2019
The seller would be required to still collect sales and use taxes on sales not made on the marketplace if their total sales (including the sales made on the marketplace) exceed the $500,000 threshold. Similarly, out-of-state sellers are required to register with the CDTFA if their total sales (including those made over the marketplace) exceed $500,000.
In recognition of the difficulty businesses might have in complying with these new requirements, AB 147 provides:
- partial tax relief to marketplace facilitators who make a good faith effort to comply with collecting a nonrelated marketplace seller’s use taxes; and
- temporary relief from penalties and interest for previously unregistered out-of-state retailers with total sales of tangible personal property of less than $1 million in the previous 12 months who made a good faith effort to comply with the new requirements. Please note that this relief is not available to California businesses that fail to comply with the new district tax collection responsibilities.
Marketplace facilitators defined
While most people automatically think of Amazon or eBay as marketplace facilitators, AB 147 takes a much more expansive approach. The expansive definition clearly encompass apps such as “letgo” or “OfferUp” as well as physical marketplaces, such as trade shows, that sell tangible personal property (TPP) for delivery to California. For businesses who are involved in creating the next great “app” or other means to help bring buyers/sellers together, they should become familiar with this expansive marketplace facilitator definition as it may apply to them.
Service businesses not impacted
California’s sales and use tax economic nexus thresholds only apply to businesses that sell tangible personal property. Service businesses that do not sell tangible personal property or businesses that only sell/license intangible property will not be required to collect sales and sue taxes from their customers.
For more information about this article, please contact our tax professionals at email@example.com or toll free at 844.4WINDES (844.494.6337).