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League Supports Legislation to Improve Collection of Sales and Use Taxes from Out-of-State Sales

AB 147 (Burke) Aims to Implement 'Wayfair' Decision

February 25, 2019
A League representative testified at the Assembly Revenue and Taxation Committee hearing today in support of AB 147, by Assembly Member Autumn Burke (D-Inglewood), which will expand the collection of millions in state sales and use taxes from out-of-state sales via the implementation of the landmark U.S. Supreme Court case South Dakota v. Wayfair, Inc., (2018). The bill passed out of committee today on a 10-0 vote.
 
The Wayfair decision addressed a longstanding problem associated with the rapid growth of online sales, resulting in the under-collection of billions in local sales and use tax revenues across the country. Previous Court decisions, led by Quill Corp. v. North Dakota (1992) 504 U.S. 298, were based on antiquated catalogue sales disputes that pre-dated the Internet and required retailers to have a physical nexus with each state prior to imposing an obligation on an out-of-state retailer to collect and remit applicable sales and use taxes from customers for remote sales. In Wayfair the Court reversed those holdings by upholding a South Dakota statute that imposed a collection requirement on out-of-state vendors selling more than $100,000 or 200 separate transactions into the state. For more background on South Dakota v. Wayfair, please see the Legal Notes article from the June 2018 issue of Western City Magazine.
 
California’s implementation of the Wayfair holding commenced in late 2018, when the California Department of Tax and Fee Administration (CDTFA), using authority of California’s existing statute, issued an implementation memo and imposed the $100,000 or 200 separate transactions threshold collection requirement on all retailers effective April 1, 2019. While some considered South Dakota’s ($100k/200 transaction) threshold too low for California, CDTFA opined that it did not have authority to set a different threshold absent a legislative change. CDTFA also flagged problems with the collection of local transaction and use taxes that required legislative clarification. Should this issue not be addressed, the state, local agencies and retailers would face nightmarish complexities attempting to track and audit compliance for hundreds of district taxes.
 
AB 147 addresses a number of problems identified by the CDTFA to smooth the implementation of Wayfair. In brief, this measure:
  • Applies a use tax collection requirement on any retailer that in the preceding calendar or the current calendar year has a cumulative sales price from the sales of tangible personal property for delivery in this state exceeding $500,000. This would make the law easier to implement for retailers, and avoid some of the disputes about compliance impacts on “mom and pop” retailers associated with the $100k/200 threshold. While the $500k threshold is higher than the $100k/200 standard, the revenue losses are considered minor.
  • Imposes broader sales and uses tax collection requirements commencing Oct. 1, 2019, on “marketplace facilitators,” which sell products pursuant to agreements with “marketplace sellers.” There will be a three-year transition period to marketplace facilitators to adjust to this new collection requirement. Applying a use tax collection requirement on large retailers who sell items for third parties closes a major tax collection loophole.
  • Clarifies that local district taxes must also be collected by any retailer meeting the state $500k threshold. This provision resolves a major implementation issue affecting local government revenues derived from collection of local transaction and use taxes. Absent this change, CDTFA is interpreting existing law to only require collection of a transaction and use tax if the retailer does more business than the threshold in a district.
  • Includes an urgency clause enabling the bill to take effect prior to the April 2019 effective date of the current CDTFA regulations. 
CDTFA estimates that AB 147 will result in the collection of an additional $309 million in FY 2019–20 and $476 million in FY 2020–21 in state and local use tax revenue. The effect of switching from South Dakota’s $100k/200 transaction standard to a $500k standard for California will result in revenue losses of $12 to $14 million over that same period.
 
Next Steps

The bill will next be heard in the Assembly Appropriations Committee. The League urges cities to submit a letter of support. Please send letters to your local legislator and a copy to cityletters@cacities.org. The full text of the measure along with the League’s support letter can be found at www.cacities.org/billsearch by plugging AB 147 into the search function.


 
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