Beginning October 1, 2019, California joins those states that are looking to hold intermediaries and agents, or marketplace operators, or as they are technically called ‘marketplace facilitators’ responsible for collecting and remitting sales tax on behalf of all marketplace sellers.
The new law shifts the onus from ‘Marketplace seller’ to ‘Marketplace facilitator’, whereby the marketplace facilitator will be considered the seller and retailer for each sales facilitated through its marketplace. As a result, th Marketplace facilitator will be required to register with CDTFA, pay Sales Tax or collect and pay use tax on each retail sale facilitated by a marketplace seller through its marketplace on all retail sales for delivery to California customers facilitated through its marketplace. This new requirement is included in the Marketplace Facilitator Act, added by Assembly Bill 1471.
To be responsible under the new law, the Market place facilitator must actively sell tangible personal property in California, or be a retailer engaged in business in this state because they have a sufficient physical presence in California, such as a business location, sales representative, or inventory; or have an economic nexus with California. In the absence of physical presence in California, economic nexus threshold test is satisfied, if the total combined sales of tangible personal property for delivery in California by such marketplace facilitator, and all persons related to the retailer exceed $500,000 in the preceding or current calendar year.
Marketplace facilitator, in general, is any person who contracts with marketplace sellers to facilitate the sale of the marketplace sellers’ products through a marketplace operated by the person or a related person.
Specifically, “Marketplace facilitator” means a person who contracts with marketplace sellers and on their behalf or on is own behalf engages in:
- Transmitting or otherwise communicating the offer or acceptance
- Owning or operating the infrastructure, electronic or physical, or technology that brings buyers and sellers together.
- Providing a virtual currency for transaction or Payment processing services.
- Software development or R&D activities related to payment processing, fulfillment or storage or listing of products for sale.
- Fulfillment or storage services.
- Listing products for sale or Setting prices or Order taking.
- Branding sales as those of the marketplace facilitator.
- Providing customer service or accepting or assisting with returns or exchanges.
“Marketplace facilitator” however, does not include Newspapers, internet websites, and other entities that advertise tangible personal property for sale, that do not perform the functions listed earlier or a ‘Delivery network company’- a business entity that maintains an internet website or mobile application used to facilitate delivery services for the sale of local products.
It is interesting to note that the term “Marketplace” used in this context means a physical or electronic place, including, a store, booth, internet website, catalog, television or radio broadcast, or a dedicated sales software application, where a marketplace seller sells or offers for sale tangible personal property for delivery in this state.
Obligation of Marketplace Sellers selling through Market place facilitators
Beginning October 1, 2019, Marketplace sellers that sell tangible merchandise through a marketplace facilitator, such as an Internet website, may not be responsible for the sales or use tax on their marketplace sales for delivery to California customers. However, a marketplace seller is not necessarily relieved of its duty for Sales/ Use Tax, if it makes sales independent of Marketplace facilitator.
Background – Wayfair case
US Supreme Court’s decision in Wayfair vs. South Dakota in June 2018 has paved the way for more than 30 states to redefine the economic nexus for States to impose Sales Tax obligations on out of state businesses. In the Wayfair case the Supreme Court overruled the 1992 Quill case judgement which required physical presence of the out of state business to satisfy the nexus requirement, thereby holding that South Dakota State laws imposing obligations on out of state sellers to comply with the State laws Tax laws even though they do not have physical presence in the state, does not violate the Commerce clause and Due process clause of the Constitution. In this landmark decision the Supreme Court ruled that the ‘physical presence rule’ is not a necessary interpretation of the requirement that a state tax must be “applied to an activity with a substantial nexus with the taxing State”. This case thereby affords greater latitude to the States to enforce their reach on certain out of state retailers selling to instate buyers.
Post Wayfair changes – Effective April 1, 2019 – Sales made to California customers:
After the Wayfair case decision, California has enacted changes whereby as of April 1, 2019, certain out-of-state retailers are required to register with the California Department of Tax and Fee Administration (CDTFA), collect California sales tax and remit taxes to the CDTFA regardless of having a physical presence in the state.
The new obligation would apply to out of state retailers who have more than $500,000 in annual sales to California customers within the preceding or current calendar year.
Change for In state businesses as well (Sales within a single District):
Beginning April 1, 2019, any retailer whose sales into a district exceed $500,000 in the preceding or current calendar year in any district, is considered to be engaged in business in that district and is required to collect that district ‘s use tax on sales made for delivery in that district.
Sales made in other states:
About 30 other states have passed laws post Wayfair decision imposing obligations on Out of State businesses to register, collect and deposit Sales tax with their State. Other state lawmakers are still studying the impact of Wayfair decision on their states and may pass similar laws soon.
Majority of the states have adopted the South Dakota threshold whereby, businesses with more than $100,000 in annual sales to customers in their state, or businesses with more than 200 sales transactions made to customers in their state within the preceding or current calendar year are covered by the obligation.