California – State Enacts Sales Tax Legislation Aimed at Remote Sellers and Marketplace Facilitators


In June 2018, the U.S. Supreme Court overturned 27 years of legal precedent holding that no state could require an out-of-state retailer to collect sales or use taxes from purchasers absent the retailer having a physical presence in that state. In South Dakota v. Wayfair, the Court upheld a South Dakota statute that required remote sellers to collect sales tax on retail sales of tangible personal property to customers in that state if, absent any physical connection to the state, the seller 1) had in excess of $100,000 in sales in the state in the prior or current year, or 2) sold tangible personal property for delivery in the state through 200 or more transactions. In so doing, the Court replaced the former bright-line “physical presence” standard of nexus for imposing sales taxes under the Commerce Clause of the U.S. Constitution with a not-yet-fully-defined “economic nexus” standard (although physical presence could arguably still be an additional basis for imposing nexus on remote sellers).

Following the Court’s decision, states rushed to pass legislation or adopt rules allowing them to take advantage of the new sales tax nexus threshold. Unsurprisingly, the adoption of economic activity standards hasn’t been uniform, with some states imposing minimum sales standards higher or lower than the South Dakota statute at issue in Wayfair and with different implementation dates, some of them retroactive. For example, Georgia recently lowered its nexus threshold to $100,000 in gross sales in the state, effective Jan. 1, 2020. Meanwhile, Alabama adopted a $250,000 gross sales test, effective October 2018. Many states haven’t yet weighed in on the matter, creating significant uncertainty and complexity for remote sellers.

California’s Recent Economic Nexus Standard Law

Recently, California enacted legislation adopting an economic nexus standard for sales taxes (Cal. AB 147). Under the new law, which is retroactive to April 1, 2019, remote sellers may be required to collect sales taxes if they exceed $500,000 in gross sales from products delivered into the state in the prior or current tax year. Unlike the South Dakota legislation at issue in Wayfair, California did not include a transactional test.

The adoption of a higher gross receipts threshold and the abandonment of a transactional test by California arguably reflect a growing realization by tax policymakers that the $100,000/200 transaction test upheld in Wayfair may not adequately protect small, interstate businesses from local entanglements, which was the original purpose of the Commercial Clause. This is especially the case because the gross receipts threshold in Wayfair was based on gross sales in the state and not necessarily taxable sales.


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by peter stathopoulos
august 19, 2019