California's New Tax Law For Online Sellers – Why You Need To Take Action
In June 2018, the Supreme Court ruled that internet retailers would be required to pay sales taxes in states (even if they don’t operate a physical brick and mortar in that area).
According to reports, the South Dakota v. Wayfair Inc. decision was “a victory for brick-and-mortar businesses that have long complained they are put at a disadvantage by having to charge sales taxes while many online competitors do not.”
But for many ecommerce-based businesses selling products to consumers in California (especially those selling on Amazon) the ruling presents a number of challenges – including the threat of steep penalty fees.
Now that Amazon has turned over all of the seller data to the state of California (due to a legal demand), every online seller distributing products to customers in California is at risk to receive a sales tax demand letter from the state.
According to Samuel Brotman, a Tax Attorney in San Diego and Founder of Brotman Law – California is pursuing this new tax issue hard.
“The way the laws are written it is very unfriendly to out-of-state sellers (including international sellers).”
If you are an online seller and currently unsure of how to navigate the Supreme Court’s new tax ruling – we’ve got all the information you need to get started.
The key is to be proactive.
“No matter where you are operating your business from because Amazon has so much contact in California (think FBA centers) if you are an Amazon Seller this is not something that will go away. Businesses need to be responsible for dealing with it and it is fixable in most cases.”
History of “Quill Corporation v. North Dakota”
Here’s some background on the original 1992 ruling and what businesses can expect now that Quill Corporation v. North Dakota has been overturned.
Nearly three decades ago, the original ruling (Quill Corporation v. North Dakota) allowed online businesses (including digitally native brands) to avoid the tax collection, unless they had a substantial connection to the state they were selling products in.
In a recent article, the New York Times said the Quill decision caused states to lose annual tax revenues of up to $33 billion.
“Quill puts both local businesses and many interstate businesses with a physical presence at a competitive disadvantage relative to remote sellers,” Justice Anthony M. Kennedy wrote.
“Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”
But because of the admin of the internet and the take-off of companies like Amazon, throughout the 1990s and 2000s, a growing number of brick and mortar companies became increasingly hostile towards sellers like Amazon.
“The perception in 2010, 2011, 2012 was that online sellers had an advantage over brick and mortar retailers in the State because they could potentially sell to California customers without having to pay tax. Which at the time – was true,” Brotman said.
“Now California is at the forefront of this issue. The state is aggressively going after out of state sellers, retailers, distributors, manufacturers and wholesalers who are operating their business outside of California but having some sort of footprint in the state.”
Tax Expert: Q&A with Samuel Brotman
Given the fact it’s been 6 months since the new ruling, we thought it was a good time to follow-up with Brotman to find out how the ruling has been interpreted by various tax authorities and is now impacting online businesses.
Q. Can you tell us about your firm and the work you do?
A. Founded in 2013, we are a five attorney firm and we specialize in California State Tax Controversies. Today, Brotman Law focuses on helping Amazon sellers navigate tax nexus laws post-Wayfair v. South Dakota.
What that means in plain English is we defend businesses in audits and we help those companies who owe more to the government than they can afford pay.
Over the last few years, we’ve been getting a number of out of state cases, representing not only sellers based in California but businesses selling to consumers in California and helping them navigate the new tax law challenges.
Q. How does the South Dakota v. Wayfair Inc. decision impact online retail brands?
A. In 2018, California passed South Dakota v. Wayfair Inc. a law that expanded the concept of doing business in California to “holding inventory through an agent” and a number of other nexus-creating activities.
The reason the Wayfair case is so critical is because the new law overturns the previous Quill case and now says that the state can impose Nexus on sellers who don’t have a physical presence in that state (based on other activities).
But there are a few problems including:
1. The Supreme Court 2018 ruling doesn’t define what those “other activities” are.
The previous ruling in 1992 had a threshold (for sales in a state) but the court was silent on this issue for the new ruling in 2018. South Dakota v. Wayfair Inc. doesn’t make any mention of progressive laws (like California and New York and some of the more active states in this realm).
2. The Supreme Court 2018 ruling doesn’t address retroactivity.
Because the new ruling doesn’t address retroactivity, the states who have passed laws before the Wayfair decision still stand (and there is still nothing being said about those laws on the Federal level).
“As I’m sure many Amazon sellers are aware, Amazon has turned over all of the seller data to the state of California. The state issued a legal demand and now has a large database of all sellers and their company name and EIN number.
So now California can take that list, compare it with the businesses registered in California, and can send out demand letters based on that information. That’s why this is so game-changing because California is pursuing this issue hard. The way the laws are written it is very unfriendly to out of state sellers.
Additionally, we have become aware that many sellers are receiving letters from California with a demand to register and become compliant before January 15th.
Q. What can online sellers do now?
A. If you are aware of the tax issue and you do something about it before getting a letter, it will make things much easier because California operates from a principal of first contact.
There are Voluntary Disclosure options, which is coming forward and giving two years of sales data and in that case, the state will waive the penalties.
There’s also a program that I like better called a Managed Audit. California has increasingly pushing businesses to go through this process – which waves the penalties and reduces the interest rate by half, which is a huge benefit, especially for larger sellers.
There are lots of different options available to sellers. This isn’t a doom and gloom issue but business have to deal with it, and quickly.
Q. What about the sellers that choose to not be proactive?
A. I do feel there’s a certain group of sellers out there living in fantasy land. For example, if you’re a seller in Florida thinking: “What can California really do to me? My business is based in Florida and I shouldn’t have to pay California sales tax.”
Well, the problem is even if you are an Amazon seller in Florida, chances are you may use a bank that has Nexus in California, so they can simply send that letter to your bank and levy you, removing those funds out of your account. Amazon also has nexus with California and California can simply levy your Amazon seller’s account.
Another issue to take note of is businesses who sell on Amazon but also have direct sales (either sell through a website or some other channel) by virtue of FBA – all of their sales are subject to California law.
Q. What are the recommended next steps?
Step 1: Figure out when your Nexus started in California.
Explore your Amazon sales reports. They contain warehouse codes to show which warehouses your products were shipped from. The first thing you want to do is figure out your start date with California. This will be the first time your inventory entered California.
Step 2: Determine how much you have in California sales over that period.
Once you have calculated your California sales multiple that number by 10% to 14% to give you an idea of how much liability you are looking at. The reason it is 10% to 14% and not 8.25% is because you need to factor in the interest and some of the penalties.
Step 3: Once you have an idea of what your exposure is then you can start using that to make decisions.
Get a tax professional involved because they are going to want to see your exposure in California as well as in other top-selling states.
What someone like me can help with is making a determination of whether or not the business you are operating as is too toxic (depending on your level of liability) to keep going.
The good news when you get a tax professional involved, there’s a number of exceptions that are available. We’ve been able to get the total sales number reduced before we actually have to file returns.
There’s a lot that we can do to help if the company doesn’t have someone who specializes in multi-state tax management. I highly recommend a tax attorney or CPA on this issue.
For more information, email [email protected]
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