Article Legal Notes by Gary B. Bell and Holly O. Whatley

Wayfair Decision Means More Sales and Use Tax Revenues for Cities

Gary B. Bell is a shareholder at Colantuono, Highsmith & Whatley, PC, and also serves as town attorney for the Town of Yountville and city attorney for the City of Auburn; he can be reached at Holly O. Whatley is a shareholder of the law firm Colantuono, Highsmith & Whatley, PC, and also serves as assistant city attorney of South Pasadena, Ojai and Sierra Madre; she can be reached at

Under a bill signed into law by Governor Newsom on April 25, 2019 (AB 147, Burke, Chapter 5, Statutes of 2019), California cities will share in additional sales and use tax revenues collected from out-of-state retailers. Based on the most recent estimates from the state Board of Equalization, the state and local governments lost an estimated $1.7 billion in tax revenues in fiscal year 2018–19 from e-commerce and traditional mail order sales — which includes a loss of $879 million for counties and cities.1

AB 147 makes clear that out-of-state retailers, including those in the e-commerce and mail order businesses, must pay California sales and use taxes to the state and local governments. This should increase revenues to counties and cities by hundreds of millions of dollars.

The Law Catches Up With the Modern Marketplace

AB 147’s enactment followed a much-anticipated 2018 decision, South Dakota v. Wayfair, Inc., in which the U.S. Supreme Court overruled decades-old precedent that prohibited a jurisdiction from imposing an obligation to collect and remit its sales and use tax on a retailer without a physical presence in that jurisdiction.2 As online sales grew exponentially over the past few decades, this outdated rule left billions of dollars in revenues for state and local governments on the table.

The Supreme Court, while often jealously guarding precedent, recognized that times had changed.3 In the increasingly online marketplace, online retailers need only maintain a few physical locations in just a handful of the thousands of taxing jurisdictions nationwide. Now a jurisdiction may impose its sales and use tax if a retailer has a “substantial nexus” with that jurisdiction even if it has no physical presence there.4

In Wayfair, the court upheld South Dakota’s “remote seller compliance law” that imposes sales and use tax collection duties on retailers without a physical presence in the state but who, in a calendar year, have gross revenues of at least $100,000 from (or complete at least 200 transactions involving) tangible property, products or services delivered into the state.5 Though the decision did not set a uniform threshold for all taxing jurisdictions, the court found that South Dakota’s thresholds established a substantial nexus sufficient to constitutionally impose its sales and use tax on out-of-state retailers.6

A sales or transactions tax is imposed on the gross receipts of tangible personal property sold by a retailer in the jurisdiction.7 A use tax is imposed on the storage, use or other consumption of tangible personal property purchased from any retailer for storage, use or other consumption in the jurisdiction.8 Thus, for transactions involving out-of-state retailers with no physical presence in the jurisdiction, when goods are shipped into the jurisdiction for storage, use or other consumption, the use tax applies. The sales or transactions tax rate must be the same as the use tax rate.9

Promoting Marketplace Fairness

Assembly Member Autumn Burke (D-Inglewood) authored the bill. She said, “AB 147 establishes a comprehensive set of post-Wayfair use tax collection rules to promote marketplace fairness while balancing the needs of consumers, small businesses, local governments, and the state.”10

Specifically, AB 147:

  1. Defines a “retailer engaged in business in the state” as any retailer that in the preceding calendar year or the current calendar year has total combined sales of tangible personal property for delivery in the state of over $500,000;11 and
  2. Defines a “marketplace facilitator” as the retailer responsible for the collection and remittance of sales and use tax effective Oct. 1, 2019.12

Although the Wayfair decision upheld a lower threshold and the California Department of Tax and Fee Administration had initially issued guidance implementing this lower threshold,13 the state decided a $500,000 threshold would spare smaller businesses (other than marketplace facilitators) from the administrative burden of collecting and remitting the tax.

Out-of-state retailers who are not marketplace facilitators must register and begin collecting and remitting sales and use tax effective April 1, 2019. The duty of marketplace facilitators to collect and remit sales and use tax, however, was deferred until Oct. 1, 2019, to allow additional time to comply.14 A marketplace facilitator contracts with sellers to sell goods and services on its marketplace (for example, an online platform) and includes businesses like eBay.15

AB 147 also provides relief to marketplace facilitators for non-compliance through Jan. 1, 2023, if the marketplace facilitator can demonstrate to the California Department of Tax and Fee Administration that it has made a reasonable effort to comply.16

Bridging the Revenue Collection Gap

California’s sales and use tax provides over $60 billion annually to local governments and the state.17 Due to California’s size and economic strength, many businesses already have a physical presence in the state and are collecting and paying sales tax. Nevertheless, AB 147 will help bridge the collection gap for those out-of-state retailers without a physical presence in California — to the fiscal benefit of state and local governments.

For a more detailed fiscal analysis of AB 147, see “Hot Topics in California Municipal Finance

Related Resources

U.S. Supreme Court Revisits Sales and Use Taxes in the E-Commerce Age

About Legal Notes

This column is provided as general information and not as legal advice. The law is constantly evolving, and attorneys can and do disagree about what the law requires. Local agencies interested in determining how the law applies in a particular situation should consult their local agency attorneys.

[1] Board of Equalization Revenue Estimate, Electronic Commerce and Mail Order Sales, April 4, 2017, p. 1 <> [as of Aug. 1, 2019]

[2] South Dakota v. Wayfair, Inc., et al (2018) 130 S.Ct. 2080.

[3] Id., at p. 2093 [noting inescapable fact of modern commercial life that substantial business is conducted without need for physical location, i.e., online].

[4] Id., at p. 2099.

[5] Ibid.

[6] Ibid.

[7] Rev. & Tax. Code, §§ 6051, 7202, 7261.

[8] Rev. & Tax. Code, §§ 6201, 7203, 7262.

[9] Ibid.

[10] Assem. Floor Analysis, Concurrence in Sen. Amends. of Assem. Bill No. 147 (2017-2018 Reg. Sess.) as amended March 21, 2019, par. 4.

[11] Rev. & Tax. Code, §§ 6203, 7202, 7262.

[12] Rev. & Tax. Code, §§ 6041, 6042 et seq.

[13] California Department of Tax and Fee Administration, Special Notice L-565, Dec. 2, 2018 <> [as of July 24, 2019].

[14] Rev. & Tax. Code, § 6042 et seq.

[15] Rev. & Tax. Code, § 6041.

[16] Rev. & Tax. Code, § 6046 et seq.

[17] California State Board of Equalization, Annual Report FY 2013-2013 <> [as of July 24, 2019].

This article appears in the October 2019 issue of Western City

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