How does a business know if it has a California sales tax nexus? Even though use tax is owed by consumers, RTC section 6203 requires retailers who are “engaged in business in this state” to collect the California use tax owed on their sales to California consumers and remit the tax directly to the CDTFA. What does engaged in business in the state of California mean exactly?
RTC section 6203 expressly provides that the term retailer engaged in business in this state “means any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution” and that definition is also incorporated into Regulation 1684, Collection of Use Tax by Retailers.
How was California Sales Tax Nexus defined prior to Wayfair?
Prior to Wayfair, the U.S. Supreme Court had held in Quill Corp. v. North Dakota (1992) 504 U.S. 298 (Quill) that a retailer does not have a substantial nexus with a state for purposes of the U.S. Constitution’s Commerce Clause, unless it has a physical presence in the state. So, retailers with a physical presence in the state of California are generally required to collect and remit the use tax to the California Department of Tax and Fee Administration.
Examples of a physical presence in California include the following: having a warehouse, an office, or a sample room in California, or any agent, representative or salesperson operating in California under the retailers’ authority to sell, deliver, or install tangible personal property. Wayfair does not affect the collection requirements for retailers that were already required to collect the state use tax pursuant to the physical presence test.
In the Wayfair decision, the U.S. Supreme Court considered a South Dakota law requiring a seller to collect South Dakota sales tax if during the previous or current calendar year the seller’s gross revenue from sales into South Dakota exceeded $100,000 or the seller made sales into South Dakota in 200 or more separate transactions. In upholding the South Dakota law, the Court overruled Quill’s physical presence requirement for substantial nexus and held that the amount of sales required by the South Dakota law is sufficient to establish a substantial nexus with a state.
California Sales Tax Nexus: Over $500,000 of sales for delivery into California
Accordingly, the CDTFA determined that a retailer whose sales into California created a substantial nexus with California was a retailer engaged in business in the state for purposes of RTC section 6203 and Regulation 1684. The CDTFA also issued a special notice in December 2018, which required such retailers to register and collect California state use tax on their sales on and after April 1, 2019, regardless of whether they had a physical presence in California (see Special Notice L-565).
AB 147 was enacted by the California Legislature with the intent to modernize California law consistent with the holding of Wayfair. AB 147 amended RTC section 6203, operative April 1, 2019, to provide that a retailer engaged in business in this state also includes any retailer that, in the preceding or current calendar year has total combined sales of tangible personal property for delivery in this state by the retailer and all persons related to the retailer that exceed $500,000.
Accordingly, as of April 1, 2019, any retailer whose sales of tangible personal property for delivery in California meet the $500,000 sales threshold in the preceding or current calendar year is a retailer engaged in business in the state. As such, these retailers are required to register with the CDTFA, collect California state use tax, and report and pay the tax to the CDTFA. These retailers include remote sellers located outside of California that sell tangible goods for delivery into California through the Internet, mail-order catalogs, telephone, or by any other means.
If you have received a letter from or been contacted by the CDTFA, this may be the beginnings of a CDTFA sales tax audit. Contact a tax attorney today to discuss your options.