Can I Close My Sales Tax Account in California?

On Monday, March 29th, the California Department of Tax and Fee Administration (CDTFA) sent out a “Special Notice” titled New Use Tax Collection Requirements for Remote Sellers and New District Use Tax Collection Requirements for All Retailers — Operative April 1, 2019. This notice was primarily explaining the previously announced changes of the new requirements for remote sellers. Our emails and phone lines immediately exploded with almost everyone who had sales below $500,000 in California asking if they could deregister and stop collecting sales tax in California.

Economic nexus thresholds do not supersede physical presence

The remote seller threshold of $500,000 is an economic nexus threshold that California has instituted in the wake of Wayfair. Economic nexus does not require a physical presence. It can be triggered by either a certain level of sales or even transactions in some states.

However, economic nexus does not replace nor does it supersede physical presence in California or in any other state that has instituted an economic presence. It is just one more way that states can require you to collect and remit tax.

Are Amazon FBA sellers remote sellers?

Depending on the definition you use for a remote seller, Amazon sellers may or may not be considered remote sellers in the abstract. However, it is a moot point, because California believes that having inventory in an FBA warehouse creates physical presence nexus. Economic thresholds do not currently apply to any seller that has physical presence nexus. So the only portion of this notice that may apply to FBA sellers is the district use tax collection requirements.

Who can deregister and stop collecting sales tax in California?

As of now, the only sellers we see who can deregister in California are those sellers who have no nexus with California. Many sellers only registered with California because of the previously announced thresholds of $100,000 or 200 transactions. If you are in this predicament, California very generously suggests that you may want to continue to collect the tax as a courtesy to your customers, which you might. But California also points out that you can and may want to deregister.

I would like to note that quite a number of Amazon sellers don’t agree with California that inventory creates nexus and therefore they believe they can deregister. We do not suggest attempting this. California is still aggressively pursuing Amazon sellers for back taxes plus penalty and interest, although California is offering managed audits and penalty mitigation programs like the 1032. We do not believe it wise to expose yourself to scrutiny if you are an Amazon seller who registered because of the April 1st deadline and you were not red-flagged by California.

But aren’t marketplaces like Amazon going to start collecting taxes for third-party sellers?

That is the plan. Effective 10/1/2019 we expect Amazon will start collecting taxes for third-party sellers. Amazon has generally complied with the new state statutes very quickly. Walmart and eBay, on the other hand, have lagged behind Amazon. In general, sellers will want to stay registered and continue collecting and remitting taxes until the platform they are selling on begins collecting and remitting on your behalf.

Any seller who is selling on their own website or any platform that does not begin collecting sales tax should remain registered and continue collecting and remitting taxes. A seller who has inventory in an FBA warehouse will still have nexus even when Amazon begins collecting the tax. The inventory is still there and so is the nexus.

Many FBA sellers make the argument that Amazon should always have been collecting the tax because the relationship is like a consignment sale. And while that is not a bad argument consigned inventory generally creates nexus. So, whoever is collecting and paying the tax does not have a direct bearing on whether nexus is created or not.

What if I am not registered in California yet?

If a seller is not currently registered in California what should they do? The answer, as is so often the answer in sales tax, is it depends. It depends on what the connection is with California. If you have inventory in California and your sales are material we believe that you should consider registering. Five months is a long time for exposure to build for large sellers. If you are only selling on a platform that is beginning to collect the tax in October you can always deregister. If your sales are not very material many sellers would choose to do nothing.

If you do not have any type of physical presence nexus and your sales are less than $500,000 then do nothing. If your sales are above $500,000 then you should register.

What about other states?

Everything we have mentioned about California can be applied to other states. For example, Washington switched its economic nexus from $100,000 or two hundred transactions to just $100,000. They eliminated the transaction threshold. Amazon has a warehouse in Washington, and Washington considers inventory in an Amazon warehouse to be nexus-creating. So you apply the same logic we did above. Stay registered if you are selling on your own website. Washington is slightly different because of the B&O tax, and even if you are only selling on Amazon, you may still be required to be registered.

In North Dakota, there are no Amazon warehouses. So now that North Dakota has eliminated their transaction threshold, sellers who only registered because of the 200 transaction threshold can immediately deregister if they so wish.

Summary

We expect to see more states tweaking their economic nexus thresholds and even more states imposing marketplace collection requirements. We urge that all sellers think their actions through, rather than rushing to deregister. Sometimes deregistering may be the best cause of action. But other times, rushing to deregister can create unintended consequences. Taking the time to carefully analyze your situation can make a big difference.

If you have any questions about this post or anything else please let us know. Deregistration is one of the services we offer and if you need help we are here.

By: Michael J. Fleming, CMI

This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.