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California Brings Out-Of-State Retailers Within Sales Tax Scope

Friday, May 10, 2019

California's Governor, Gavin Newsom, has signed into law provision to add a sales tax collection obligation on out-of-state retailers whose annual sales in California exceed USD500,000 in any year.

The obligation begins starting October 1, 2019. The regime features a higher de minimis threshold than previously proposed of USD100,000.

The introduction of the new tax collection obligation follows the ruling in Wayfair, in which the US Supreme Court overturned existing case law in ruling that a state can collect sales tax on remote sales even when the vendor does not have a physical presence in the state.

In so doing, the Supreme Court overturned the pre-internet Quill decision of 1992, which held that states cannot force sales tax collection obligation on vendors who do not have personnel or property in the state (the "physical presence" standard).

In examining the constitutionality of a South Dakota sales tax law that requires collection of the state's sales tax by internet vendors with at least 200 transactions or USD100,000 in sales to South Dakota residents, the court observed that physical presence "is not necessary to create a substantial nexus."

It also said that it is no longer possible to defend the physical presence requirement from the point of view that its removal would create undue administrative burdens on out-of-state vendors and disrupt inter-state commerce, given the technology that makes remote online sales possible.