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Buy stuff online? New California tax law takes effect Monday, but the rules might change

Tax reform is ‘profoundly difficult’ in California, Gavin Newsom says

Lt. Gov. Gavin Newsom told The Sacramento Bee editorial board in February that he's in favor of extending a temporary tax increase.
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Lt. Gov. Gavin Newsom told The Sacramento Bee editorial board in February that he's in favor of extending a temporary tax increase.

Pump the sales tax brakes.

Out-of-state online retailers who make more than 200 transactions or $100,000 in California sales have four days before they must begin collecting and remitting state sales tax from shoppers.

But California lawmakers are fast-tracking a bill that would make critical amendments to the new regulation under the California Department of Tax and Fee Administration, which is requiring non-California businesses to register with the state and start collecting state sales tax.

Assemblywoman Autumn Burke, D-Marina del Rey, and state Sen. Mike McGuire, D-Healdsburg, are spearheading Assembly Bill 147, which raises the sales threshold for mandatory tax collection to $500,000 so that small retailers don’t have to collect taxes on nominal sales they make in California.

“A higher threshold will make the implementation easier and capture the vast majority of tax revenue generated by online retailers here in the state,” McGuire said. “This is a well thought out and comprehensive approach. This bill strikes a balance between all the stakeholders. California retailers, online platforms, out-of-state businesses and many others.”

The proposal would then require third-party sellers on sites like eBay, Amazon and Etsy, to collect and pay the taxes on behalf of its sellers beginning Oct. 1, 2019 “because collecting tax from a few larger marketplaces is easier than from several thousand sellers,” according to the bill analysis.

Another main concern the authors have is how businesses will navigate the unique tax codes in each of the 269 local governments that have distinct sales taxes in California. Their bill raises the threshold for mandatory tax collection in local districts, too.

The bill is an attempt to level the playing field for small businesses in California that have always collected taxes but who are competing with online retailers that don’t, while also ensuring the raised sales cap works for businesses that sell to California’s nearly 40 million residents. The state estimates 27,000 companies will register by April 1.

The legislation follows a 2018 Supreme Court ruling in South Dakota vs. Wayfair that allowed states to collect tax from online retailers anywhere. South Dakota does not have state income tax and relies on sales to help finance the general fund. The state’s Legislature set the threshold at $100,000 or 200 separate transactions in South Dakota.

Burke and McGuire contend a rule that works for South Dakota might not be the right fit for California.

“It is clear to me that a one-size-fits-all approach modeled after South Dakota law is not necessarily appropriate for a state with 40 million residents,” Burke said when she introduced the bill. “It is important that we create a level playing field for all businesses in our state, especially small business.”

With AB 147, California would earn $787 million in additional revenue within two years. McGuire said the money would go toward public safety personnel and transportation costs in local jurisdictions, according to a legislative analysis. The estimate is similar to the revenue Gov. Gavin Newsom projected the state would raise from new online sales tax collections in his January budget proposal.

It’s improbable the legislative machinery will work fast enough to pass the amendment before CDTFA’s Monday enactment, but the bill has an urgency clause attached to it. Having already passed the Assembly, AB 147 is now in the Senate and will likely receive votes by next week. State Treasurer Fiona Ma, an advocate for the proposal, called the issue “complicated but pressing.”

“The good news is that Democrats and Republicans alike are supporting this bill to implement a commonsense approach when it comes to the most important supreme court ruling on taxes in years,” McGuire said. “With the expedited legislative timeframe, it will allow the state to work with online retailers by October, work out the kinks and be prepared for the holiday season.”

CDTFA spokesperson Casey Wells said the impending legislation won’t change whether the tax is due or the tax rate on a transaction and that the agency is proceeding forward with Monday’s registration.

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Hannah Wiley joined The Bee as a legislative reporter in 2019. She produces the morning newsletter for Capitol Alert and previously reported on immigration, education and criminal justice. She’s a Chicago-area native and a graduate of Saint Louis University and Northwestern.