On April 25, 2019, California Governor Gavin Newsom signed Assembly Bill 147 into law, modifying use tax nexus thresholds for state and local district taxes, and establishing marketplace collection requirements. These provisions are summarized below.

Bright-line Use Tax Nexus Threshold

The definition of a “retailer engaged in business in this state,” which is responsible to collect tax, is expanded to include a retailer that has total combined sales of tangible personal property for delivery into California in excess of $500,000, with no threshold for the number of transactions. Sales by related entities are considered when determining whether this threshold is exceeded. This provision is effective April 1, 2019.

Also effective April 1, 2019, sellers are required to collect local district use taxes once the seller exceeds $500,000 of sales into the state, regardless of the amount of sales into each local district.

Eversheds Sutherland Observation:

Previously, the California Department of Tax and Fee Administration (CDTFA) issued Special Notice L-565 (Dec. 11, 2018), which adopted a state use tax nexus threshold of $100,000 in sales or 200 separate transactions for remote sellers. These thresholds are equivalent to the thresholds established by South Dakota, which were upheld by the Supreme Court of the United States in South Dakota v. Wayfair, Inc., No. 17-494, 585 U.S. __ (2018). Per Special Notice L-565, these thresholds were set to take effect April 1, 2019. That same day, the CDTFA also issued Special Notice L-591 that established the same nexus thresholds for local use tax purposes applicable to each local taxing district effective as of April 1, 2019. The bill supersedes these requirements.

Marketplace Facilitators

The bill also requires marketplace facilitators to collect and remit use tax on sales made through marketplaces. A “marketplace” includes both physical and electronic stores.

“Marketplace facilitator” is broadly defined as a person “who contracts with marketplace sellers to facilitate for consideration, regardless of whether deducted as fees from the transaction, the sale of the marketplace seller’s products through a marketplace operated by the person or the related person” and who also both:

(1) directly or indirectly transmits or communicates the offer or acceptance between the buyer and seller; owns or operates the infrastructure or technology that brings the buyers and sellers together; provides a virtual currency that buyers are allowed or required to use for purchases from the seller; or, conducts research and development regarding certain activities directly related to a marketplace; and (2) directly or indirectly engages in payment processing services, fulfillment or storage services, listing products for sale, setting prices, branding sales as those of the marketplace facilitator, or order taking; or, provides customer service or accepts or assists with returns or exchanges.

A marketplace facilitator is considered to be the seller and retailer of each sale facilitated through its marketplace. Therefore, the marketplace facilitator is required to register with the CDTFA as a seller and collect use tax on all sales through the marketplace.

The marketplace facilitator provisions of the bill are effective beginning October 1, 2019.

Temporary Small Business Relief

The bill includes a temporary provision to grant relief to small businesses. Specifically, penalties and interest assessed against a retailer may be waived by the CDTFA for tax periods through December 31, 2022, where the total sales of tangible personal property into California is $1 million or less if such retailer registers and was not required to be registered under prior law.

Eversheds Sutherland Observations:

  • Although the bill provides that the nexus thresholds are effective on April 1, 2019, the bill also states that the provisions governing the thresholds cannot have any retroactive effect. As a result, the actual date of enforcement for the new $500,000 threshold is the date that the bill was signed into law by the Governor. This creates some uncertainty regarding the $100,000 or 200 transaction threshold established by Special Notice L-565, which purported to take effect on April 1, 2019. The CDTFA may issue additional guidance regarding the validity of the requirements imposed by Special Notice L-565 for the interim period between April 1, 2019, and the date that AB 147 was signed into law. Absent any guidance indicating that Special Notice L-565 does not apply, however, there may be a legal challenge to any imposition of tax based on the lower thresholds established in the Notice.
  • The bill extends the $500,000 state-level threshold to local district taxes, meaning that there is no separate threshold that must be exceeded at the local level in order for the seller to be required to collect and remit local district taxes. The lack of a separate threshold for each local jurisdiction raises the possibility that a seller will be required to collect and report local district use taxes in a district where the seller has only a single sale, regardless of the dollar amount of that sale. The Supreme Court in Wayfair did not directly address the constitutionality of requiring remote sellers to collect and remit local taxes once nexus is established with a state. Furthermore, this is a departure from the approach taken in Special Notice L-591, which required that a seller exceed the threshold based on sales into each local district in order to be subject to collection requirements for that district’s taxes.