The unofficial draft’s last line states that its stipulations “shall not have any retroactive effect.” The draft also sets up language that would require marketplaces such as Amazon.com and Etsy to collect and remit tax on behalf of the retailers selling on their sites. The marketplace language in the draft mirrors language in other states with marketplace laws by calling for the marketplaces to collect and remit tax if their vendors have a total of $10,000 of sales into the state.
Nothing concrete about how to handle remote sales has yet come out of California, which has four taxing agencies. The circulation of the unofficial draft follows an incident in June in the wake of South Dakota’s victory in South Dakota v. Wayfair, the U.S. Supreme Court ruling that struck down the physical presence test for collection and remittance of sales and use tax. In that incident, one of the agencies — the California Department of Tax and Fee Administration — accidentally released on its website guidance purporting to require out-of-state retailers to collect and remit sales and use tax by Aug. 1. The notice was quickly taken down.
The legislative draft language states that it is “intended to protect small businesses,” first by raising the threshold for collection to $500,000. The level for collection in South Dakota’s law, which other states have copied, is $100,000. Then the draft says California would “define the term ‘retailer’ to include marketplace facilitators and require marketplace facilitators that meet the higher economic activity threshold to collect and remit the use tax on behalf of their marketplace sellers that are not registered with the California Department of Tax and Fee Administration to collect and remit the use tax; and alleviate the burden of tracking economic activity in each individual district that imposes a district tax.”
In contrast with California, which is floating unofficial plans, about half of states have moved definitively to proceed with legislation or regulation to require remote sellers to collect and remit sales and use tax. But California, enormous and complex, should proceed with caution, said David Kline, spokesman for the California Taxpayers Association.
“California’s sales tax laws are much more complex than those in other states — we have countless local add-on taxes and the state is considering changing sourcing rules for determining where the sale takes place — so it is important that the state not rush into anything,” Kline told Law360. “California officials need to use a transparent regulatory process and take the time to get it right, so we don’t end up in an administrative nightmare.”
Mike Shaikh of Reed Smith LLP in Los Angeles said legislation would be far preferable than the “administrative pronouncement” the CDTFA accidentally published in June. On Wednesday, Shaikh and two colleagues from offices in Philadelphia and San Francisco sent out a widely shared client alert about that accidental publication. The alert from Shail Shah, Yoni Fix and Shaikh attached the administrative notice and raised questions about the approach.
“We just found it odd,” Shaikh told Law360. “We found it a little worrisome that that document even existed in the first place.”
Unlike the legislative draft, the administrative document mirrored South Dakota’s thresholds of $100,000 or 200 separate sales into the state. It did not address retroactive collection of sales and use tax.
Law360 reached out to the California Department of Tax and Fee Administration repeatedly for comment on both the legislative draft and the administrative document. On the legislative draft, CDTFA has not provided a comment.
On the administrative draft, the agency said it made a mistake.
“That was an unofficial internal-only document that was inadvertently placed on our test website,” said Paul Cambra, a spokesman for the CDTFA. “It was a draft written prior to the Supreme Court ruling and was not for publication or public distribution. Now that the court has issued its ruling, CDTFA is currently evaluating the next steps in a thoughtful manner that supports California taxpayers.”
Greg Turner, a sole practitioner in Sacramento with several decades of experience in California taxation, said he would remain concerned about retroactive application of any post-Wayfair rule in California unless the Legislature specifically directed the CDTFA to adopt a prospective-only standard and not to enforce any different standards.
Turner said he remained concerned because California’s nexus statute, which took effect in 2012, conforms the state to constitutional nexus. Until Wayfair, that standard was physical presence. Now it is unclear, and furthermore, the court’s decision was that physical presence never applied at all. Turner said it is difficult to know now from what year the California nexus standard would apply.
“We have a retroactivity problem,” Turner said. “So the question for CDTFA is … are they applying Wayfair retroactively? If not, when will they begin enforcement under the new standard? When will taxpayers be given notice of what exactly that new standard is, because most of the commentary on Wayfair is speculation and frankly inconsistent.
“Will CDTFA engage in an interested parties process? Will they produce the new standard by regulation, as opposed to notice? All valid questions.”
