California Explains its Response to Wayfair

Alston & Bird

On October 24, 2018, the California Department of Tax and Fee Administration (“CDTFA”) held a stakeholder’s meeting to discuss the impact of South Dakota v. Wayfair on use tax collection in California. Among those at the meeting from the CDTFA were Nicolas Maduros (Director), Trista Gonzalez (Chief of Tax Policy), and Robert Tucker (Assistant Chief Counsel). For the majority of the meeting the CDTFA fielded questions from attendees.

During the course of the meeting, the CDTFA explained its planned response to Wayfair. California Rev. & Tax. Code Section 6203(c) states that California’s sales and use tax authority extends to the extent of “substantial nexus” under the Commerce Clause of the United States Constitution. The CDTFA reads Wayfair to set substantial nexus for interstate sales and use tax collection at no more than $100,000 of sales into the state or 200 transactions into the state during a calendar year. Accordingly, the CDTFA believes that it has no choice but to set California’s economic nexus threshold at $100,000 of sales or 200 transactions.

To effectuate this policy, the CDTFA plans to issue a public notice before the end of 2018 implementing these economic nexus thresholds, which will take effect between 30 and 60 days after the notice is published. Because the CTDFA views imposing the thresholds as implementing existing law, it will not go through the regulatory process required by California’s administrative procedures act. The CDTFA plans to measure the economic nexus thresholds by sales into the state in the prior calendar year, and the CTDFA will not enforce economic nexus retroactively.

Rev. & Tax. Code Section 7262 imposes the same “substantial nexus” for collection of district  (e.g., city and county) use taxes that Section 6203(c) imposes for collection of state use taxes. For this reason, the CDTFA will apply the $100,000/200 transaction threshold to each district in California individually. This means that a remote seller making sales into California will be required to track both its total sales into the state and its sales into each individual taxing district. In addition, an in-state retailer will be required to collect use tax in a district where it is not currently engaged in business if the retailer meets the economic nexus thresholds in that district. Under current implementation of the law, no use tax collection is required in this circumstance.

Several commentators at the meeting pushed back on the CDTFA’s conclusion that Wayfair demands a substantial nexus threshold of $100,000/200 transactions, some suggesting that California’s adoption of such standards would actually open the state up to legal challenges under the case. In response, the CDTFA reiterated that it believes itself to have no discretion on the issue under Wayfair and Section 6203(c). However, the CDTFA noted that the California Legislature could impose a different threshold by statute, though the CDTFA will not wait on the Legislature to go back into session before issuing its policy bulletin.

The CDTFA invited interested parties to provide feedback on its interpretation of Wayfair‘s application to California law. The period for providing comments closes November 7, and comments can be filed at The Department will take no further public comment before issuing its public notice.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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