Reed Smith Client Alerts

California has indicated that it plans to issue a notice imposing use tax nexus thresholds similar to South Dakota’s by the end of the calendar year.  If California decides to adopt these nexus thresholds via notice, such adoption may be subject to legal challenges by taxpayers.

Authors: Shail P. Shah Mike Shaikh Priscilla Ayn Parrett Yoni Fix Rebecca G. Durham

(This is a republication of Law360’s October 29 installment of Reed Smith’s California Tax Takes monthly column.)

Stakeholders meeting

On October 24, 2018, in response to the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc.,1 the California Department of Tax and Fee Administration (CDTFA) held a Wayfair Stakeholders Meeting to solicit comments from the public with respect to its plan to issue a notice containing new tax collection rules for retailers.  This notice would impose use tax collection thresholds for remote vendors similar to the $100,000 in sales or 200 transaction thresholds adopted under South Dakota’s law by the end of the year.  The exact compliance deadline was not announced, however, it is expected to be in early 2019.

Representatives from the CDTFA (including CDTFA Director, Nick Maduros, and CDTFA’s Legal Division lawyers) did not commit to specific nexus thresholds during the meeting.  But when asked about the enforceability of Wayfair via a notice, the CDTFA representatives stated that CDTFA’s lawyers currently believe that between the California ‘Long-Arm’ provision (discussed below) and the Wayfair decision, CDTFA has the authority to enforce the same nexus thresholds in South Dakota without passing any additional legislation or regulation.

Current California law

California Revenue and Taxation Code Section 6203(a) currently provides that “every retailer engaged in business in this state” making non-exempt sales of tangible personal property for storage, use or other consumption in California shall collect California sales and use tax from the purchaser at the time of the sale. 
Section 6203(c) (the ‘Long-Arm’ Provision) defines “retailer engaged in business in this state” to mean “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.”

Prior inadvertent posting of Wayfair tax collection rules and proposed legislation

This is not the first time since the Wayfair decision that CDTFA has expressed its intent to adopt nexus thresholds similar to the ones adopted under South Dakota’s law.

Shortly after the Wayfair decision, the CDTFA inadvertently posted on its website a draft notice containing new tax collection rules for retailers, indicating that California may adopt use tax collection thresholds for remote vendors similar to the thresholds adopted under South Dakota’s law effective August 1, 2018.  The draft notice stated that certain retailers would be required to register with the CDTFA and to collect California use tax, if they met one of the following thresholds during the preceding or current calendar year:

  1. The cumulative sales price of the retailer’s sales of tangible personal property for delivery in California exceeds $100,000, or
  2. The retailer sold tangible personal property for delivery in California in 200 or more separate transactions.

The CDTFA has since removed the draft notice from its website, and a CDTFA representative has said that the document was an unofficial, internal-only document that was inadvertently placed on the CDTFA website.  The CDTFA’s representative added that the draft was written prior to the Wayfair decision and was not intended for publication.

Subsequent to this inadvertent posting, a draft bill from the Department of Finance was introduced with a $500,000 nexus threshold for use tax collection.  But lawmakers adjourned for the year without considering this legislation. 

In response to the Legislature’s inaction, the CDTFA affirmatively announced its intent to apply new tax collection rules for retailers based on sales thresholds for remote vendors similar to the thresholds adopted under South Dakota’s law.