As online sales surge, more sellers are using larger online marketplaces to provide their products online, oftentimes using the popular Fulfillment by Amazon (FBA) program. FBA sellers do not sell their products at wholesale to the marketplace facilitator; instead, the marketplace facilitator holds and fulfills the inventory on behalf of the sellers in its own distribution centers. The marketplace facilitator often has the discretion to move sellers’ inventory without notification, which can lead to the sellers establishing state income, franchise, and sales and use tax obligations unknowingly.
California has been aggressively pursuing sales and use tax collection by the sellers that maintain inventory in marketplace facilitators’ California warehouses. In December 2018, the California Department of Tax and Fee Administration (CDTFA) obtained a list of sellers with inventory in the state from Amazon and shortly thereafter issued notices to the unlicensed sellers demanding taxes for the maximum amount of time allowed per California law, eight-years or when the seller first established nexus, whichever is more recent.
The Governor of California signed Senate Bill No. 92 on June 27, 2019, which among other things, provides an opportunity for sellers whose only connection to the state is inventory held for sale by a marketplace facilitator to limit the sales and use tax deficiency from eight years to three years retroactive to April 1, 2016. Additionally, the bill provides an abatement of penalties associated with the tax owed for the period April 1, 2016, through March 31, 2019.
“Qualified retailers” must meet the following:
- Registration within 90 days
- File returns for the period beginning April 1, 2016
- Pay all outstanding taxes for the period beginning April 1, 2016, or by an authorized installment plan with the last payment on or before December 31, 2021
- The retailer must not have previously registered with the CDTFA prior to December 1, 2018
- The retailer must not have filed sales and use tax returns prior to being contacted by the CDTFA
- The retailers only nexus with the state must be the inventory for use by a marketplace facilitator in California
The state also recently implemented an economic nexus standard requiring out-of-state vendors with more than $500,000 of sales in the state to register to collect sales and use tax, effective April 1, 2019. Note that if a company registered to comply with the economic nexus standards, but previously had nexus due to its inventory held by a marketplace facilitator, it is still liable for taxes owed dating back to the first date its inventory entered the state.
Companies that have received notices from the CDTFA are encouraged to participate in the above program to receive the forgiveness of taxes owed prior to April 1, 2016 and a full penalty waiver. Those vendors are not eligible for the traditional voluntary disclosure program that offers similar terms; they do not qualify due to the receipt of the notice issued by the CDTFA. Consequently, this is the best opportunity to get compliant– but companies must take action quickly because the 90-day clock is ticking.
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Published on July 12, 2019 © Copyright CBIZ, Inc. and MHM. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
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