California is still working to implement the Wayfair ruling, and likely won’t start requiring remote sellers to collect and remit sales taxes until 2019.
At an October 15 informational hearing held by State Assembly members, Nicolas Maduros, director of the California Department of Tax and Fee Administration (CDTFA), said the department is proceeding with stakeholder talks and anticipates being able to implement sales tax collection and remittance obligations on remote retailers beginning early next year. He noted that other large states, including Florida, Texas, and New York, have also been slow to implement the U.S. Supreme Court ruling in South Dakota v. Wayfair Inc.
Maduros said his department believes it has the authority to implement remote sales tax collection and remittance under the state’s long-arm statute, a catchall that requires sales tax compliance from retailers to the fullest extent allowed under the commerce clause. Because of Wayfair, experts say California’s authority includes the ability to pursue remote sales tax collection from sellers that meet the thresholds upheld in the case — 200 or more annual sales transactions or over $100,000 in yearly sales into the state.
However, Maduros said, the state may need to adopt different nexus thresholds, because California has a larger population and a more complicated sales tax regime than South Dakota, a member of the Streamlined Sales and Use Tax Agreement.
Maduros said nexus thresholds will be discussed at the CDTFA's October 24 meeting with stakeholders. Other questions to be addressed include how much time businesses meeting the thresholds should have before they're required to collect sales taxes, and how the state can most efficiently obtain compliance from those sellers. He also said the department will avoid retroactive enforcement of Wayfair, a provision of South Dakota's law that the Supreme Court majority praised in its opinion.
Maduros said a bill might likely be introduced in 2019 that would clarify the implementation of Wayfair, including setting a higher sales volume threshold for California. Notably, draft legislative language that was released near the end of the 2018 legislative session proposed a $500,000 sales threshold for triggering sales tax collection obligations for remote sellers.
Assembly member Autumn Burke (D), who chairs the chamber's revenue and tax committee, said at the October 15 meeting that a $500,000 threshold would be fairer to sellers, because California’s large population could mean that even relatively small retailers could wind up with over $100,000 in annual sales into the state. It was also suggested that a higher threshold could reduce strain on the CDTFA's tax enforcement resources because it would reduce the number of remote sellers the department has to pursue for compliance.
Maduros told lawmakers that the difference between projected revenues from a $500,000 annual sales threshold versus a $100,000 threshold is relatively small. He added that businesses with $500,000 in annual sales into California will likely be larger, more sophisticated retailers that would have an easier time complying with the tax rules.
Most of the state's $1 billion to $2 billion in forgone revenue from remote sales comes from larger, more sophisticated e-commerce companies that have the resources to comply with California’s sales tax regime, according to Maduros. “Our research tells us that approximately 80 percent of online sales come from 2 percent of retailers,” he said. “We have some very large retailers, who are among the most technologically advanced companies on Earth, who are not collecting and remitting use tax.”
Maduros also cautioned that joining the SSUTA would require “hundreds of changes to California tax law,” including disallowing popular exemptions.
San Jose State University law professor Annette Nellen said at the hearing that it’s unlikely the state would join the SSUTA as a full member because California's size makes it difficult to simplify its sales tax regime the way smaller streamlined members have. But she said the state could implement some elements of South Dakota’s sales tax system for added protection against constitutional challenges, such as providing sellers with free software and protection against burdensome sales tax audits if they comply in good faith.
“California perhaps could say, ‘Well, we’re going to take that feature and we’ll do it on our own’’” without joining the SSUTA, Nellen said.
Maduros said California already has four offices tasked with pursuing remote sales tax compliance. He said the CDTFA tracks over 1 million taxpayers and estimates the additional number of remote sellers that would be added post-Wayfair would be around 50,000, which would be an incremental increase.
“We’re ready to go in terms of the registration piece,” Maduros said.
Nellen said it’s too early to judge the effectiveness of initial efforts at remote sales tax enforcement post-Wayfair, noting that some states’ remote seller rules went into effect only this month.
“How do they reach out, to even identify who these new remote sellers are that meet that threshold?” Nellen asked. “I think that still remains to be seen.”
Maduros said that the CDTFA, in addition to meeting with stakeholders, is also alerting as many remote retailers as possible of likely sales tax collection obligations.
Maduros said he’s also confident that many businesses would voluntarily comply. “We would focus our efforts to try to [generate] voluntary compliance, which is really the cheapest money we can bring into the system,” he said.