California Is Pursuing Online Retailers Who Owe Back Sales Tax
The California tax department dedicated efforts to collect sales and use back taxes from online retailers. Before April 1, 2019, shoppers were spared from paying local taxes while making purchases from online retailers. The law now equalizes out-of-state retailers with regular stores. Thus, requiring them to collect and remit sales and use tax if sales exceed the $500,000 economic nexus threshold.
Further, California Department of Tax (CDTFA) began targeting using online merchants who used fulfillment services, like fulfilled by Amazon. By using inventory at fulfillment centers as the company’s physical presence proxy, CDTFA asserted that the seller has nexus in California, which subjected them to its sales tax collection rules.
As an aside, CDTFA is facing backlash from online retailers accusing the agency of unfairly targeting Fulfillment by Amazon sellers for back sales tax. The Online Merchants Guild, which is the plaintiff, raised a suit against the agency on September 29, 2020.
Now, online retailers who do business through Amazon receive notices from the agency that require payment of back taxes. Further, some amount to millions, threatening the stability of their businesses.
Do Online Retailers Have a Negotiating Room With Back Taxes?
By law, the CDTFA demands back taxes for at least three years and sometimes as far back as eight years from sellers. Arguably, the liability could be subject to a limitless lookback period if the company is not registered.
Facing large liabilities and long lookback periods, qualifying online retailers received a sales tax relief following the passing of the bill in 2019. If certain requirements are met, the bill prevents the agency from assessing any sales and use tax before April 1, 2016. Then, it provides relief against any penalties imposed based on sales made from April 1, 2016, to March 31, 2019. As for retailers who failed to meet the conditions below, they will likely get an assessment stretching past April 1, 2016. It's also important to note that California is among the states which have also tightened sales tax laws on marketplace facilitators like Amazon. The law requires them to collect and remit sales taxes from third-party sellers.
In general, a qualifying retailer is a marketplace retailer who participates in business in the California state and who currently or previously relied on a marketplace facilitator to facilitate sales through their platform, and the facilitator offered storage for their merchandise in the state.
Retailer Tax Relief
For online retailers to qualify for the tax relief, they have to fulfill certain conditions:
- They did not register the business with the CDTFA under the Sales and Use Tax law before December 1, 2018.
- They did not file sales and use tax returns or pay sales and use taxes before contact from the CDTFA.
- Voluntarily registering with the CDTFA by September 25, 2019. Then, file completed tax returns for tax periods with the probable determination issued on or after April 1, 2016. Lastly, either pay the full tax or apply for a payment plan on the condition that the final payment is paid by December 31, 2021.
- They are or were doing business in the state only due to using a marketplace facilitator for sales delivery. Additionally, the facilitator provided storage for the retailer's inventory in the state.
Keeping the tax relief in mind, online retailers need to comb through their paper trail and transactions to determine if the marketplace facilitator they used created a physical nexus in California. Failure to do so will lead to hefty penalties and interest.
Need Help With Your Sales Tax?
As an online retailer, determining your nexus in California can get confusing and frustrating. We ensure you don't miss out on your sales tax obligations on the backdrop of the CDTFA dealing with back taxes. Please contact us for more information on California sales tax laws and any current updates.