When it came to certain state taxes, physical presence used to be the primary factor determining whether a retailer was required to collect and remit those taxes. However, after the South Dakota v. Wayfair, Inc. ruling on June 21, 2018, physical presence is no longer of utmost importance. California is one of about 30 states who have codified this ruling. As adopted, AB 147 now requires retailers who are not physically present in California but who generate over $100,000 in annual sales from California, or complete more than 200 transactions with California residents within the preceding calendar year to collect and remit state sales tax. Additionally, the law requires those out-of-state retailers selling over $500,000 of tangible personal property for delivery into California in the current or preceding calendar year to charge and remit California use tax. Finally, those retailers who do a certain amount of business within a California district where they do not have a physical presence are required to charge and remit those district taxes.
In its Wayfair ruling, the Supreme Court of the United States ruled that retailers being exempt from collecting and remitting certain taxes in states where the retailers were not physically located was “unsound and incorrect.” The Supreme Court abandoned this previous physicality requirement and instead held that any retailer with certain economic and virtual contacts with a state could be subject to that state’s sales tax rules. No guidance was provided as to what exactly these contacts should be in order to subject retailers to these tax rules.
California, among other states, took steps to codify this ruling and provide clarity as to the contacts required. AB 147, signed into law on April 25, 2019, provides the guidelines for requiring out-of-state retailers to collect and remit certain state taxes.
This rule does not apply to all out-of-state retailers who sell goods in California. Instead, the minimum threshold to be subject to this new rule is $100,000 in sales or 200 completed transactions for sales taxes and $500,000 in sales for use taxes. Any retailer who meets these thresholds over a one year period is required to comply with this rule. Because of the one year limit to this threshold, an out-of-state retailer may be subject to this rule for some months while not subject to it for others. The starting date for determining whether an out-of-state retailer is subject to this rule is April 1, 2019. Thus, out-of-state retailers will start measuring their deliverables to California from April 1, 2019, going forward.
Although tedious for the out-of-state retailers, this rule alleviates the responsibility of California consumers to report certain California taxes on these same items. California charges sales and use taxes on goods purchased outside of California; however, for goods delivered into California by these out-of-state retailers, the tax is usually to be reported and paid by the consumer. Now, those out-of-state retailers subject to this rule will be required to collect and remit the tax, instead of the consumer reporting and paying the same directly to the taxing authorities.
Beyond these taxes, those out-of-state retailers who meet the minimum thresholds and deliver a certain amount of goods to particular districts within California will be required to collect and remit district taxes as well.
The rule provides exemptions for certain types of goods. Among those on the list are: animals, feed, seeds, and plants which are for human consumption; blood storage units; Buddy Poppy pins or other symbolic lapel pins; drugs and medicines furnished by veterinarians; certain food products; medical identification tags; certain medicines; ophthalmic materials; wheelchairs, crutches, canes, and walkers. There are also a number of partially exempted products.