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California moves to raise sales tax collections from out-of-state retailers

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.

Shoppers looking for a bargain by skipping California sales tax will soon close a loophole that let them buy goods from out-of-state online retailers without immediately paying local taxes.

That deal ends on April 1 for thousands of out-of-state online retailers that will be required to collect California sales tax for the first time, according to a regulation the California Department of Tax and Fee Administration released on Tuesday.

The new rule applies to businesses that generate more than $100,000 in annual sales from Californians, or from companies that conduct 200 or more transactions in California.

As many as 27,000 companies might be required to register with the state and begin collecting tax, department spokeswoman Stacie Spector said.

She said the number could be lower. It comes from a list that the state has kept over eight years of online retailers doing business in the state. Some retailers previously identified by the tax department presumably do not meet the thresholds that would trigger a reporting requirement.

The rule makes use of new taxing authority that state and local governments gained last summer when the Supreme Court handed down a decision that allowed them to collect sales tax from all online retailers, provided they meet criteria to be determined by each state.

Previously, government agencies could collect tax from online retailers only if the businesses had a physical presence in their states. California has used that authority to collect tax from online retailers with warehouses or other offices in the state since 2012.

“Today’s announcement does not increase or create any tax,” tax department Director Nick Maduros said in a news release. “Rather, California will now require more out-of-state retailers to collect and remit taxes just as brick-and-mortar retailers have done for decades.

The regulation might not be the end of the discussion about how California interprets the Supreme Court ruling in South Dakota vs. Wayfair. The decision centered on South Dakota’s efforts to collect tax from Wayfair, an online retailer.

Democratic leaders from the Legislature’s revenue committees and Treasurer-elect Fiona Ma announced this week that they plan to consider legislation that would help the state use its new taxing power “effectively” and “fairly.”

“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,” Assemblywoman Autumn Burke (D-Inglewood), said in a news release announcing the plan.

She leads the Assembly Committee on Revenue and Taxation. Senate Committee on Governance and Finance Chairman Mike McGuire, D-Healdsburg, is working with her on the proposal.

Ma, a member of the Board of Equalization, told Yahoo Finance earlier this month that she wants Amazon to collect sales tax on behalf of the third-party businesses that sell products on its website.

“They should be doing the right thing,” Ma told Yahoo Finance. “We have asked them to do it but they don’t want to do it. So we’re going to compel them next year.”

State officials estimate they could collect $1 billion a year in new revenue by requiring out-of-state online retailers to collect tax.

The tax department in October held a forum for businesses to ask questions about the regulation.

Several tax attorneys urged the state to set a higher threshold. They were particularly worried about a clause that requires online retailers to collect city and county taxes if they do $100,000 worth of business in a special tax district.

That could prove confusing for out-of-state retailers who will be collecting different taxes for San Francisco, Sacramento, Los Angeles and other communities with special sales taxes.

“The country is watching what California is doing, and it would be nice to see a threshold increase,” Michael Cataldo, a tax attorney, said at the forum. “It would benefit the small business in California that would be subject to similar thresholds in other states.”

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