Retail clients that sell through Amazon or other marketplaces may have already had an obligation to collect sales tax in states where their inventory is stored for sale, but some relief could be coming.
A bill recently signed into law on by California Governor Gavin Newsom could provide some relief to businesses that (perhaps unwittingly) established nexus with the state through inventory stored for sale in a marketplace facilitator’s warehouse or fulfillment center.
Senate Bill 92 limits “the issuance of a deficiency determination” for qualifying retailers, defined as “a retailer that is or was engaged in business in this state solely because the retailer used a marketplace facilitator to facilitate sales for delivery in this state and for which the marketplace facilitator stored the retailer’s inventory in this state.”
For those still catching up, in the year since the Supreme Court of the United States overruled a long-standing physical presence rule, more than 40 states have adopted economic nexus laws that base a sales tax collection obligation solely on a remote seller’s economic activity in the state.
No matter what your retail clients’ level of economic activity is, having a physical presence in a state establishes nexus, a connection significant enough to trigger a sales tax collection obligation. Physical presence nexus can be established in several ways, including owning or leasing a brick-and-mortar building like an office, store, or warehouse, or by having temporary or permanent employees in a state. It can also be established by storing inventory for sale in a state, even if that inventory is stored in a warehouse or fulfillment center owned and operated by a third party.
Marketplace sellers with this sort of physical presence nexus may have flown under the radar of state tax authorities for years, but it’s getting harder for them to do so. States can require marketplaces to share marketplace seller information — we know Amazon has done that with at least Massachusetts and New York. Furthermore, marketplace sellers are required to identify themselves to tax departments once they establish economic nexus in a state.
The fact that inventory in a state can establish sales tax nexus for remote sellers can’t be emphasized enough. This is true in all states.
Limited Relief for Some Marketplace Sellers
Prior policy allowed the California Department of Tax and Fee Administration (CDTFA) to hold such marketplace sellers liable for up to eight years of use tax liability. With the new law, qualifying retailers are only liable for the tax and penalties due on sales made from April 1, 2016, to March 31, 2019 — the three years preceding the April 1, 2019, enforcement date of economic nexus in California.
Not all marketplace sellers are eligible to take advantage of this offering. SB 92 is only open to retailers that are or were engaged in business in California solely because they used a marketplace facilitator to facilitate sales for delivery in California, and the facilitator stored the retailer’s inventory in the state. Furthermore:
A retailer must not currently be registered with the CDTFA or have registered with the department prior to December 1, 2018; and
A retailer must not have filed sales or use tax returns or made sales or use tax payments prior to being contacted by the CDTFA.
Finally, within 90 days of the June 27 effective date, the retailer must voluntarily register with the CDTFA and file completed tax returns for all tax reporting periods for which a determination may be issued under this section. Retailers must pay in full the taxes due (or apply for an installment agreement under which the final payment is made no later than December 31, 2021).
Tweaking District Use Tax Liability
The bill also adjusts district use tax liability in the state. Previous law required districts that impose use taxes to include a provision in their use tax ordinance stating that a seller is engaged in business in the district if, in the current or calendar year, it has more than $500,000 in total combined sales of tangible personal property in the state. This provision took effect on April 1, 2019.
SB 92 specifies that the district use tax ordinance provisions are operative on April 25, 2019, instead of April 1, 2019. So, affected sellers get some breathing room. The just-replaced district use tax provision was the result of a law that was enacted on April 25, but effective retroactively to April 1, 2019.
While SB 92 does limit past use tax liability for sellers, it doesn’t do away with it altogether. If your client’s business had inventory stored for sale in California between April 1, 2016, and March 31, 2019, or before, you should have a plan to get compliant.
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts and endeavors to make complex sales tax laws more digestible for both experts and laypeople.