Effective April 1 2019 the state legislature of California enacted economic nexus for sales tax with a threshold set at $100,000, however, effective immediately, the state has changed this provision by increasing the threshold to $500,000. This change impacts any business which sells products or services within or to individuals or business into the state of California. It does include online sales.

If you registered under the $100,000 threshold (and don’t exceed the new $500,000 threshold), you can choose to either maintain your account or cancel it if you no longer meet the economic nexus thresholds within the state. Please keep in mind that if you do not meet the new $500,000 threshold and choose to maintain your account with the state of California you may still have filing requirements.

The California Legislature recently passed Assembly Bill No. (AB) 147 which requires:

Retailers located outside of California (remote sellers) to register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax if, in the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer exceed or exceeded $500,000; and

All retailers required to be registered with the CDTFA, whether located inside or outside of California, to collect and remit district use tax to the CDTFA on all sales made for delivery in any district that imposes a district tax if, in the preceding or current calendar year, the total combined sales of tangible personal property in this state or for delivery in this state by the retailer and all persons related to the retailer exceeds or exceeded $500,000.

The new collection requirements are operative as of April 1, 2019, and supersede our previous direction regarding 1) the use tax collection requirements for out-of-state retailers (see Special Notice L-5652), and 2) the district use tax collection requirements for all retailers, including retailers located inside or outside California (see Special Notice L-5913).

If you are a remote seller who previously registered with the CDTFA to collect California use tax due to the state’s prior direction (see Special Notice L-565), and you do not meet the new $500,000 sales threshold pursuant to AB 147, nor do you have any contacts with California that would qualify you as a retailer engaged in business there, you may either close your account or continue to collect the use tax as a courtesy to your California customers.

To close your account, please contact the California legislature’s Customer Service Center at 1-800-400-7115. Please be advised, any use tax collected by you from your California customers must be reported and paid to the CDTFA. Additional registration and fee collection requirements for sales of certain items may apply.

Please note: If you sell 1) new tires or vehicles and equipment that include new tires, 2) covered electronic devices, 3) lead-acid batteries, or 4) lumber or engineered wood products, you may have additional registration and fee collection requirements.

If you have questions, please contact HBK Tax Advisory Group member Cassandra Baubie, JD, at CBaubie@hbkcpa.com.

This document provides a guide on how drop shipping relationships have changed following the new tax laws and regulations after the decision in South Dakota v. Wayfair.

Drop shipping is a fundamental aspect of the supply chain and represents two separate and distinct transactions. The seller accepts orders from their customers, invoices the customers and receives a shipping address. That shipping address can be in a state in which the seller has a presence or any other state that the seller is not located in. The seller then places an order with the supplier to fulfill the customer’s order who will ship that product directly to the shipping address provided. The supplier never invoices or deals directly with the customer; they engage in a sale solely with the seller.

Click here to read the full article.

MTC’s Online Marketplace Seller Voluntary Disclosure Initiative

The Multistate Tax Commission (“MTC”) recently announced the roll out of its new “Online Marketplace Seller Voluntary Disclosure Initiative” for online retailers. This program is a very rare opportunity for taxpayers to come into sales tax compliance with multiple states. This initiative, which eliminates tax, penalties, and interest for all prior tax periods, is something that will likely not be offered by these states again, so it is important to take advantage of it now. Best of all, taxpayers are permitted to apply to the program anonymously! Read on for a brief rundown of the initiative to determine if it is right for you and your business.

Who?

This program is advantageous for online retailers doing business in any of the participating states. In order to qualify for the program, a taxpayer must meet the following criteria:

1. For the tax type that relief is being sought in that state: cannot be registered, cannot have filed any returns, cannot have made payments, and cannot have had any other prior contact with the state concerning potential liability;
2. Must be an online marketplace seller using a marketplace provider or facilitator (i.e. Amazon’s FBA¹ ) to facilitate retail sales into the state with limited nexus-creating contacts in the state;
3. Must submit a complete application by the due date; and
4. Must be seeking relief from any past due sales/use tax liability and/or income/franchise tax liability in connection with its online retail sales activity in the state. A taxpayer will not be granted relief from any sales/use tax that it collected, but did not remit.

What?

In order for states to impose a tax liability on an out-of-state company selling products or services in the state, the company must have sufficient nexus to the state. Nexus may be created when your company has certain “connections” to the state, including having an office, inventory, employees, an agent, or a certain dollar amount of sales within the state.

For a taxpayer who has sufficient sales tax nexus to a state, but fails to collect or file in that state, the lookback period starts on the date that the taxpayer began business within the state. The state may assess tax, penalties, and interest all the way back to that date. However, with a typical voluntary disclosure program, a state will limit the lookback period to three or four years. When the taxpayer applies to the state’s voluntary disclosure program, the taxpayer will be required to both file returns and pay back tax liability, plus interest, for the lookback period. After that, the state then will usually waive the tax liability, penalties, and interest for any tax years prior to the lookback period.

Under the current MTC program, most of the participating states will waive sales/use and income/franchise back tax liability (including penalties and interest) for all prior tax periods for qualifying taxpayers. In other words, states are eliminating the lookback period in exchange for the taxpayer agreeing to get into compliance with the state. Taxpayers may get into compliance by registering with the state, timely collecting and remitting tax, and filing all appropriate returns.

In most states, your business could be granted complete amnesty for all prior periods of sales/use tax and income tax liability! In the current tax environment, states are becoming more aggressive and creative in tracking down online marketplace sellers. States not only have improved technology to locate sellers that have nexus to the state, but the states are also passing more and more legislation to create nexus with sellers. This program gives online marketplace sellers an affordable chance to catch up and get into compliance. It is always better to reach out to a state through a voluntary disclosure program to reap the advantageous benefits rather than to risk being caught by the state and hit with large penalties and interest.

Where?

The states currently participating in the program are:

• Alabama
• Arkansas
• Colorado
• Connecticut
• District of Columbia
• Florida
• Idaho
• Iowa
• Kansas
• Kentucky
• Louisiana
• Massachusetts
• Minnesota
• Missouri
• Nebraska
• New Jersey
• North Carolina
• Oklahoma
• South Dakota
• Tennessee
• Texas
• Utah
• Vermont
• Wisconsin

While the above listed states are all participating in the program, a participant’s application will be submitted separately to each state in which the participant wishes to enter into a voluntary disclosure agreement. While most states are willing to waive any back sales/use tax and income/franchise tax liability, some states have unique rules.

When?

Now! The program is only available for a short time and runs from August 17, 2017 to October 17, 2017. In order to be considered for the program, you must apply by the deadline. Since this is a strict deadline, it is important to contact HBK as soon as possible to get the application process started.

Your next step- contact your HBK professional! We will work with you to determine if this program is appropriate for your business and if you would qualify. We will also help you examine the potential benefits and risks of participating in this program and what it would mean for your business going forward. If you decide to apply to the program, we will complete the application and guide you through each step of the process. Please keep in mind that applications are due by October 17, 2017, so do not wait!

1 – Fulfillment by Amazon (“FBA”) is a business model where Amazon stores a seller’s inventory and upon a sale, packs and ships the product to the customer on behalf of the seller. While FBA allows online sellers a quicker way to get products to customers, it also typically creates nexus in every state where the seller’s inventory is located.