California Announces New Use Tax Collection Requirements for In-State and Out-of-State Retailers

California, the state with the fifth-largest economy in the world, has not required many out-of-state sellers to collect and remit tax on their California sales in the past. That will soon change.

The California Department of Tax and Fee Administration (CDTFA) announced recently that beginning April 1, 2019, out-of-state retailers selling above certain thresholds into California will be required to collect California use taxes on their sales into California. These notices also impact in-state and out-of-state retailers’ obligations to collect and remit district use taxes adopted by California localities.

“This announcement does not increase or create any tax,” said CDTFA Director Nick Maduros. “Rather, California will now require more out-of-state retailers to collect and remit taxes just as brick-and-mortar retailers have done for decades. With the Supreme Court’s decision in Wayfair, California is able to help level the playing field for California businesses.”

On June 21, 2018, the Supreme Court of the United States ruled that a state can tax sales by an out-of-state business (South Dakota v. Wayfair, Inc.). Prior to the Wayfair ruling, a state could tax sales by businesses with a physical presence in the state, but not those by remote sellers. In Wayfair, the court found this physical presence rule to be “unsound and incorrect,” thus opening the door for states to tax remote as well as in-state sales.

The Wayfair ruling centered on South Dakota’s economic nexus law, which imposes a tax collection obligation on businesses with more than $100,000 in annual gross revenue from South Dakota sales, or at least 200 sales of tangible personal property or services delivered or transferred electronically to South Dakota customers in one year.

Many states have adopted South Dakota–style economic nexus in the wake of the ruling. Some (e.g., Hawaii, Indiana, and Vermont) had unenforced economic nexus laws waiting in the wings, while others (e.g., Michigan and New Jersey) were quick to establish new laws. California is now among them.

This means, effective April 1, 2019, if the $100,000 sales or 200 transactions threshold was met in 2018:

  • California retailers must begin collecting and remitting district use taxes for districts in which the threshold was met; and
  • Out-of-state businesses must register with the CDTFA and begin to collect and remit California State and district use taxes if the threshold was met in the state and the district.

Please contact us with any questions you have about sales tax collection requirements.