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Online retailers will soon need to collect California sales taxes

On April 1, 2019, a new California Department of Tax and Fee Administration (CDTFA) rule will go into effect. It requires out-of-state online retailers who have annual California transactions of 200 or more or generate more than $100,000 in sales from Californians to collect and remit sales taxes.

This closes a loophole that allowed some to buy merchandise online from out-of-state firms and avoid paying state sales tax (7.25 percent) and local sales taxes (which vary based on the county and city, for example totaling 7.75 percent in Irvine versus 10.25 percent in Santa Monica). As many as 27,000 companies could be affected.

Why the change?

In the past, the state collected sales taxes from online retailers who maintained a physical presence in the state. A warehouse or office was often enough to meet this test.

Last summer, the U.S. Supreme Court expanded states’ ability to require that internet retail companies collect state sales taxes in the South Dakota v Wayfair decision. Effectively overruling the physical-presence rule, Justice Kennedy writing for the majority said, “that [the physical-presence rule] allows remote sellers to escape an obligation to remit lawful state tax is unfair and unjust.”

California had allowed voluntarily sales taxes collection, but found that many did not actually do so. That is why they moved to a mandate. State officials would like to see Amazon, in particular, work with third-party companies that use its platform to collect sales taxes.

Estimates are that the mandate could bring in more than $1 billion a year in revenues to the state.

Businesses need to pay close attention to their California sales volume. A registration requirement with the CDTFA kicks in once an out-of-state e-commerce company meets the economic nexus threshold as well.

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