California establishes revised economic nexus standard

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On April 25, 2019, Gov. Gavin Newsom signed Assembly Bill 147 into law, which modifies California’s sales and use tax economic nexus provisions for remote sellers without a physical presence in the state, and establishes marketplace collection requirements.¹ The legislation imposes an economic nexus threshold of $500,000 in sales of tangible personal property for both state and local district use taxes, superseding the previous $100,000 sales threshold and 200 transaction threshold previously adopted via administrative pronouncement by the California Department of Tax and Fee Administration (CDTFA). The economic nexus provisions are effective April 1, 2019.

Background In South Dakota v. Wayfair, the U.S. Supreme Court rejected the physical presence requirement for purposes of sales and use tax nexus, finding that South Dakota’s economic nexus statute satisfied the substantial nexus standard under the U.S. Constitution.² California did not take specific action in response to the Wayfair decision until December 2018, when the CDTFA issued a special notice announcing that it would adopt an economic nexus threshold of $100,000 in sales or 200 separate transactions for purposes of state use tax for out-of-state retailers.³ The standard applied to out-of-state retailers making taxable sales of tangible personal property into California on or after April 1, 2019.

The CDTFA concurrently issued a special notice establishing the same economic nexus thresholds for purposes of California local district use taxes.⁴ Effective April 1, 2019, any retailer whose sales of tangible personal property into a district exceeded either the sales or transaction thresholds was considered to be doing business in that district. As such, retailers would be required to collect that district’s use tax on sales made for delivery in that district.

Revised economic nexus standard Under California law, a “retailer engaged in business in this state” has a use tax collection and remittance obligation in California. The legislation expands this definition to include economic nexus provisions for remote sellers, and creates similar collection requirements for marketplace facilitators.

Remote sellers Under the new law, a retailer having total combined sales of tangible personal property for delivery into California in excess of $500,000 in the preceding or current calendar year, is considered to be a retailer engaged in business in the state. ⁵ There is no alternative threshold for the number of transactions to customers in the state. Sales by related entities are included in the calculation of the sales threshold.⁶ Similarly, remote sellers are also now required to collect local district use taxes once they exceed the $500,000 sales threshold, regardless of the amount of sales made into each local district.⁷ These provisions supersede the $100,000 sales and 200 transaction thresholds administratively adopted by the CDTFA, with an effective date of April 1, 2019.⁸

The legislation eliminates California’s affiliate nexus⁹ and click-through nexus provisions¹⁰ that were previously in place under the state’s sales and use tax law. The bill also includes a temporary relief provision for small businesses not previously subject to California’s new economic nexus provisions. Under this provision, penalties and interest assessed against a retailer may be waived by the CDTFA for tax periods from April 1, 2019, through Dec. 31, 2022, where the total sales of tangible personal property into California is $1 million or less if the retailer was not required to be registered for California sales and use tax under prior law.¹¹

Marketplace facilitators The bill also establishes new sales tax collection and remittance requirements for marketplace facilitators. Effective Oct. 1, 2019, a marketplace facilitator¹² is considered to be a seller and retailer for each sale facilitated through its marketplace for purposes of determining whether it has a sales tax filing obligation in California.¹³ As such, marketplace facilitators are subject to the state’s $500,000 sales threshold for purposes of determining whether they have economic nexus with California. Sales counting toward the threshold include sales made on the facilitator’s own behalf and on behalf of all related persons, as well as sales facilitated on behalf of marketplace sellers.¹⁴

A marketplace facilitator may be relieved of liability for use tax if it can demonstrate to the CDTFA that it made a reasonable effort to obtain accurate information from an unrelated marketplace seller and that failure to remit the correct amount of tax was due to incorrect or incomplete information received from the marketplace seller.¹⁵ The marketplace facilitator tax relief provisions apply to sales made through Dec. 31, 2022.

Effective date In response to the enactment of an increased $500,000 sales threshold for remote sellers, the CDTFA issued Special Notice L-632, specifying that the new use tax collection requirements and increased sales thresholds carry an operative date of April 1, 2019.¹⁶ Special Notice L-632 clarifies that the new collection requirements as provided under the law supersede the CDTFA’s previous direction as provided in its former special notices released in December 2018.

Commentary California’s increased sales threshold of $500,000 represents a notable departure from the $100,000 sales threshold and 200-transaction thresholds that were established administratively. The CDTFA modeled the initial thresholds after South Dakota’s thresholds, which were sustained by the U.S. Supreme Court in Wayfair. The California legislature eventually settled on a higher threshold likely in recognition of the market considerations for smaller businesses selling into California, a state with a population over 40 times as large as that of South Dakota. California joins only a handful of larger market states adhering to a $500,000 sales threshold through statutory or regulatory guidance, such as Massachusetts, Ohio and Texas.

The new $500,000 state-level sales threshold also applies to local district use taxes. However, the law provides that there is no separate threshold that must be exceeded on a district-by-district level for remote sellers to be required to collect and remit local district taxes. This approach differs from that taken by CDTFA as outlined in its special notice, which specified that remote sellers would be subject to district collection requirements only if they exceeded the threshold based on sales into each local district. This provision increases the likelihood that a remote seller will be required to collect and remit local district use taxes even in districts with minimal sales activity, including districts where the seller has only a single sale. 

Although the legislation provides that the nexus thresholds for remote sellers are effective April 1, 2019, the actual date of enforcement for the new $500,000 sales threshold is April 25, the date that the bill was signed by the governor. This created some ambiguity regarding the legislation’s interaction with the $100,000 sales or 200 transaction threshold established by the CDTFA, which technically took effect on April 1. However, the issuance of Special Notice L-632 makes it unlikely that the CDTFA would enforce the thresholds that were in place before the April 25 enactment date.

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1 A.B. 147, Laws 2019.
2 138 S. Ct. 2080 (2018).
3 Special Notice L-565, New Use Tax Collection Requirements for Out-of-State Retailers Based on Sales into California, California Department of Tax and Fee Administration, Dec. 11, 2018.
4 Special Notice L-591, New District Use Tax Collection Requirements for All Retailers, California Department of Tax and Fee Administration, Dec. 11, 2018.
5 CAL. REV. & TAX. CODE § 6203(c)(4)(A).
6 California follows the definition of a related entity in accordance with IRC Section 267(c). CAL. REV. & TAX. CODE § 6203(c)(4)(B).
7 CAL. REV. & TAX. CODE § 7262(a)(1).
8 CAL. REV. & TAX. CODE § 6203(f)(1).
9 Previously, a retailer engaged in business in California included any retailer that was a member of a commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performed services in California in connection with tangible personal property sold by the retailer. Former CAL. REV. & TAX. CODE § 6203(c)(4), repealed effective April 25, 2019.
10 California’s click-through nexus provisions provided that out-of-state retailers were considered to be doing business in California if they entered into agreements with persons in California that directly or indirectly referred potential purchasers of tangible personal property to the retailer, whether by an internet-based link, internet website or otherwise, provided that the retailer met specified total cumulative sales thresholds. Former CAL. REV. & TAX. CODE § 6023(c)(5), repealed effective April 25, 2019.
11 CAL. REV. & TAX. CODE § 6203.1.
12 A “marketplace facilitator” is a person who contracts with marketplace sellers to facilitate for consideration the sale of the marketplace seller’s products through a marketplace operated by the person or a related person, and who does both of the following:
1) Directly or indirectly transmits or communicates the offer or acceptance between the buyer and seller; owns or operates the 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, order taking, or providing customer service (including accepting or assisting with returns or exchanges). CAL. REV. & TAX. CODE § 6041(b). 13 CAL. REV. & TAX. CODE § 6042.
14 CAL. REV. & TAX. CODE § 6044. A “marketplace seller” is a person who has an agreement with a marketplace facilitator and makes retail sales of tangible personal property through a marketplace owned, operated or controlled by a marketplace facilitator. CAL. REV. & TAX. CODE § 6041(c).
15 CAL. REV. & TAX. CODE § 6046. The amount of liability relief under this provision is limited to a percentage of the total sales and use tax due on sales facilitated by the marketplace facilitator for marketplace sellers (exclusive of sales made by the marketplace facilitator or related parties). The percentage is 7% in the fourth quarter of 2019 and 2020, 5% in 2021 and 3% in 2022. CAL. REV. & TAX. CODE § 6047.
16 Special Notice L-632, New Use Tax Collection Requirements for Remote Sellers and New District Use Tax Collection Requirements for All Retailers – Operative April 1, 2019, California Department of Tax & Fee Administration, Apr. 2019.

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