July 2019 marks the second anniversary of the creation of the California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA). Since the passage of The Taxpayer Transparency and Fairness Act of 2017, also known as A.B. 102,1 the Golden State has made several modifications to its use tax rationale. The June 2018 U.S. Supreme Court decision, South Dakota v. Wayfair, Inc. et al.,2 and the legislation that followed launched the most significant changes.
Changing of the Guard – Creating the CDTFA and OTA
The “New” CDTFA
Effective July 1, 2017, A.B. 102 established a new department that would shift duties, powers, and responsibilities, other than those imposed by the California Constitution, away from the five-person elected California State Board of Equalization (BOE) which previously had control of sales and use tax administration and the administrative appeals process.3 Most of BOE’s tax functions, including California sales and use tax administration, are now under the CDTFA which is part of the Executive Branch reporting to the Governor.
Today, the BOE still oversees county property tax administration, prepares the state assessed property roll, administers the Private Railroad Car Tax, and the Tax on Insurers, and is responsible for Alcoholic Beverage Taxes.4
The “New” OTA
A.B. 102 also created an independent OTA to replace the BOE as the final administrative appeals body for state taxes.
The OTA hears all appeals cases for taxes administered by the CDTFA and Franchise Tax Board. The OTA is comprised of panels consisting of three administrative law judges. Taxpayers may represent themselves in the appeals process as they are not required to be represented by a CPA or attorney. Shortly after its creation, Emergency Regulations adopted late in 2017 provided that past precedents based on BOE cases may be overturned in whole, or in part, by decisions made by OTA’s administrative law judges. That is, new cases may not rely on precedents set prior to July 1, 2018. To date, however, the OTA appears to be following BOE precedents in its business tax decisions.
The CDTFA and the OTA are the new sales and use tax authorities for all administrative and appeal matters. As a result of this significant change, there are now five agencies governing taxation:
- Board of Equalization (BOE),
- California Department of Tax and Fee Administration (CDTFA),
- Employee Development Department,
- Franchise Tax Board, and
- Office of Tax Appeals (OTA).
The Addition of Economic Presence to the Nexus Presumption
In 2011, A.B. 1555 amended California’s Revenue and Taxation Code (RTC) section 6203 to temporarily repeal recently passed Assembly Bill ABX1 28 which required collection of use tax by retailers who sold over $1,000,000 during any preceding 12-month period to purchasers in California, when more than $10,000 of those sales resulted from an agreement with an in-state affiliate under which that person, for a commission or other consideration, referred potential customers to the retailer. The effective date for the end of the temporary repeal (i.e., re-enactment of the affiliate nexus provision) was dependent on whether a federal law was enacted to authorize states to collect taxes on sales to instate purchasers without regard to the location of the seller. If no federal law were enacted by July 31, 2012, use tax collection by out-of-state retailers would take effect on September 15, 2012. If such a law was enacted by that date, the change would take effect January 2013. (The change would not apply if the retailer could demonstrate that the referrals under the agreement would not satisfy the requirements of the U.S. Constitution’s Commerce Clause.6) No federal law was enacted by the bill’s specified date, so these provisions took effect on September 15, 2012. Amazon began collecting California tax on its own sales that same day, but A.B. 155 left the out-of-state retailers selling on Amazon as the ones solely liable for use tax collection on those sales.
On June 21, 2018, the Supreme Court’s decision in Wayfair superseded Quill,7 concluding that the physical presence rule for nexus did not reflect economic reality and that it was an incorrect interpretation of the Commerce Clause. This decision had an almost instant effect on California’s use tax. Although many states needed to draft legislation to respond to the Wayfair decision, RTC section 6203 had already been modified by A.B. 155 to allow for imposition of use tax on remote sellers. The Wayfair decision thus confirmed that there would be no Commerce Clause considerations restricting its application.
Meanwhile, BOE and CDTFA staff had found out-of-state retailers whose only connection to California was contracting with a third-party California warehouse to store and ship goods on their behalf. These warehouses were not involved in marketing or solicitations: their only roles were storing, packing, and shipping. BOE, however, began registering and assessing tax on these retailer’s sales into California, as well as on sales of items shipped from the California warehouses. The assessments were based on either RTC section 6203(c)(1) or RTC section 6010.5.
This year, California passed A.B. 1478 to amend RTC section 6203 to refine the use tax collection responsibilities of remote sellers. Like other states’ initiatives mimicking South Dakota’s sales thresholds and economic nexus laws, California initially administratively enacted thresholds of $100,000 or 200 separate transactions into the state. After public feedback and months of consideration, the thresholds were modified by statute by raising the dollar amount to $500,000 and eliminating any reference to the number of transactions. The law became effective April 1, 2019.
California’s statute of limitations, RTC section 6487, specifies an eight-year lookback period when no returns have been filed. RTC section 6487.05 provides a three-year lookback for unregistered out-ofstate taxpayers under certain conditions, one of which is not having been first contacted by CDTFA. S.B. 92 provides a three-year use tax collection lookback and penalty relief for qualified retailers for whom the only nexus to the state was through a marketplace facilitator.9
Additionally, A.B. 147 defines a “marketplace facilitator” as a person responsible for the collection of tax from sales made in its marketplace, including websites, media advertising, or any other way customers might be reached. Like the economic nexus threshold, the marketplace facilitator threshold is $500,000. Many states across the country are similarly enacting rules and regulations to address the marketplace idea.
The expansion of nexus in California now covers three different concepts: traditional physical presence (RTC section 6203), economic thresholds (S.B. 92); and marketplace facilitators (A.B. 147). These sales and use tax administrative changes over a short period of time increase the importance of understanding how the rules work. As the entire country shifts to accommodate the digital renaissance, so too is sales and use tax collection adapting. It is important to embrace these changes and be ready to register, collect, and remit. Time will determine the full effect of these major changes to the California sales and use tax administration. ■