decision addressed a longstanding problem associated with the rapid growth of online sales, resulting in the under-collection of billions in local sales and use tax revenues across the country. Previous Court decisions, led by Quill Corp. v. North Dakota
(1992) 504 U.S. 298, were based on antiquated catalogue sales disputes that pre-dated the Internet and required retailers to have a physical nexus with each state prior to imposing an obligation on an out-of-state retailer to collect and remit applicable sales and use taxes from customers for remote sales. In Wayfair
the Court reversed those holdings by upholding a South Dakota statute that imposed a collection requirement on out-of-state vendors selling more than $100,000 or 200 separate transactions into the state. For more background on South Dakota v. Wayfair
, please see the Legal Notes
article from the June 2018 issue of Western City
California’s implementation of the Wayfair
holding commenced in late 2018, when the California Department of Tax and Fee Administration (CDTFA), using authority of California’s existing statute, issued an implementation memo and imposed the $100,000 or 200 separate transactions threshold collection requirement on all retailers effective April 1, 2019. While some considered South Dakota’s ($100k/200 transaction) threshold too low for California, CDTFA opined that it did not have authority to set a different threshold absent a legislative change. CDTFA also flagged problems with the collection of local transaction and use taxes that required legislative clarification. Should this issue not be addressed, the state, local agencies and retailers would face nightmarish complexities attempting to track and audit compliance for hundreds of district taxes.
AB 147 addresses a number of problems identified by the CDTFA to smooth the implementation of Wayfair.
In brief, this measure:
- Applies a use tax collection requirement on any retailer that in the preceding calendar or the current calendar year has a cumulative sales price from the sales of tangible personal property for delivery in this state exceeding $500,000. This would make the law easier to implement for retailers, and avoid some of the disputes about compliance impacts on “mom and pop” retailers associated with the $100k/200 threshold. While the $500k threshold is higher than the $100k/200 standard, the revenue losses are considered minor.
- Imposes broader sales and uses tax collection requirements commencing Oct. 1, 2019, on “marketplace facilitators,” which sell products pursuant to agreements with “marketplace sellers.” There will be a three-year transition period to marketplace facilitators to adjust to this new collection requirement. Applying a use tax collection requirement on large retailers who sell items for third parties closes a major tax collection loophole.
- Clarifies that local district taxes must also be collected by any retailer meeting the state $500k threshold. This provision resolves a major implementation issue affecting local government revenues derived from collection of local transaction and use taxes. Absent this change, CDTFA is interpreting existing law to only require collection of a transaction and use tax if the retailer does more business than the threshold in a district.
- Includes an urgency clause enabling the bill to take effect prior to the April 2019 effective date of the current CDTFA regulations.
CDTFA estimates that AB 147 will result in the collection of an additional $309 million in FY 2019–20 and $476 million in FY 2020–21 in state and local use tax revenue. The effect of switching from South Dakota’s $100k/200 transaction standard to a $500k standard for California will result in revenue losses of $12 to $14 million over that same period.
The bill will next be heard in the Assembly Appropriations Committee. The League urges cities to submit a letter of support. Please send letters to your local legislator and a copy to firstname.lastname@example.org
. The full text of the measure along with the League’s support letter can be found at www.cacities.org/billsearch
by plugging AB 147 into the search function.