With online retail becoming the preferred method of shopping in America, it was only a matter of time until states would start demanding their share of the sales pie. Unlike purchases in a physical store location, loopholes let bargain buyers purchase online goods from out-of-state retailers without having to immediately pay state and local taxes.

However, in the wake of a sweeping Supreme Court case, California has announced that as of April 1, 2019, out-of-state retailers will be required to collect and remit sales tax for goods sold online to customers within the state.

What changed

California’s new rule materialized shortly after the U.S. Supreme Court ruled in favor of South Dakota collecting taxes from the online retail giant, Wayfair, in the June 2018 case of South Dakota v. Wayfair, Inc. Prior to the ruling, states were limited in their ability to collect tax on transactions with businesses that did not have a physical presence in the state.

While the new tax rule does not create or increase taxes, it will require more businesses to collect and remit taxes in the same way traditional brick-and-mortar retailers have always done.

As of April 1, 2019, certain out-of-state retailers are required to register with the California Department of Tax and Fee Administration (CDTFA), collect California sales tax and remit taxes to the CDTFA regardless of having a physical presence in the state. The new rule is effective for all taxable sales on or after April 1 and is not retroactive.

It’s important to note that the new rule expands the requirement to collect and remit taxes into the local districts. The rule will not only impact out-of-state sellers, but also California based sellers that will now have to comply with the sales tax collection and remittance for the hundreds of different city, county and local sales and use tax jurisdictions in California.

Who is affected

The new rule mimics South Dakota’s ruling and applies to businesses with more than $100,000 in annual sales from California, or businesses with more than 200 transactions in the state within the preceding or current calendar year. California district taxes will be triggered when these thresholds are met in a particular jurisdiction. Impacted retailers include all those selling tangible goods into California, including via internet, mail-order catalogs and telephone.

What retailers need to know

With as many 30 states having proposed (or having already passed similar tax changes), retailers will have to pay attention to the particular nuances outlined by each state in which they sell. Many of the states have varying thresholds, including different values and definitions of key metrics.

For example, Georgia mandated a $250,000 annual sales threshold or 200 transactions, while Massachusetts set a threshold of $500,000 in annual sales plus at least 100 individual transactions. Retailers will need to know every state’s individual rules and accurately track their sales within each state to know where their numbers stand. Failure to comply opens up the potential of audits, interest and even penalties.

Depending on the state, retailers could be required to begin collecting sales tax the moment they surpass the designated threshold. Retailers should ensure their numbers are up-to-date and they have the means to immediately comply with the rules. Automated tax technology could be a huge asset for collecting, remitting and filing sales taxes in multiple states.

Although many states have responded with similar rules after the Wayfair ruling, California’s adoption is especially significant because it is the fifth-largest economy in the world and home to a whopping 40 million residents. Some state officials estimate that the state could collect as much as $1 billion in taxes a year from out-of-state retailers.

Ultimately, the Wayfair ruling has created the opportunity to level the tax playing field between traditional retailers (brick-and-mortar) and online retailers. As more states continue to adopt rules similar to South Dakota, we can expect to see more clarification and guidance coming from tax authorities as the year unfolds.