California Pursuing Income Tax from Out-of-State Sellers Using Third-Party Platforms
The U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. removed the long-standing requirement that physical presence is necessary to create sales or use tax nexus for out-of-state sellers. Since this decision, sellers continue to experience evolving requirements for collecting and remitting state sales or use tax on sales to in-state customers, with a new focus on sales made on third-party platforms. States are increasing their efforts to pursue sellers that may have failed to collect sales tax on prior sales shipped from warehouses operated by online marketplaces like Amazon. The goal is to recover payments of unpaid taxes for increased state revenues.
California is not only concerned with collecting sales or use tax from remote sellers tied to customers or inventory in the state, but also is interested in connecting previously uncollected sales tax to potentially unreported state income taxes from the same out-of-state sellers using these online platforms. The California Franchise Tax Board (FTB) recently sent out notices to online merchants stating that remote sellers may be deriving income from California sources with a potential income tax filing obligation.
California’s efforts have implications for remote sellers that may have triggered income tax nexus if a specific California sales threshold is met. Out-of-state sellers may be subject to income tax if their sales into the state for taxable years beginning on or after January 1, 2019, exceeded $601,967 or 25 percent of their total sales everywhere. Housing inventory in the state may also subject an out-of-state seller to income taxes. Granted, most out-of-state sellers of tangible personal property are protected from state net income taxes by Public Law 86-272 depending on their facts and circumstances. However, other minimum or franchise taxes may apply. Public Law 86-272 provides no protection for these taxes. For instance, entities organized as limited liability companies (LLC) can be subject to California’s LLC fee in addition to the minimum $800 tax if California gross income exceeds $250,000. The FTB notices also indicate that fees and penalties will apply if sellers fail to respond and file a return within 60 days of the notice date.
Every remote seller should consider whether an income or franchise tax filing obligation exists in California either by annual sales thresholds or by housing inventory within the state. If so, there may be opportunities to mitigate penalties and interest prior to receiving a notice, such as filing a voluntary disclosure agreement with the state.
To learn more about how California’s efforts may affect your filing obligations, contact your BKD Trusted Advisor™ or submit the Contact Us form below.