California Governor Gavin Newsom approved Assembly Bill 147 on April 25, requiring out-of-state/online sellers and marketplace facilitators to collect sales and use tax on taxable transactions if they have more than $500,000 in total combined sales of tangible personal property in California in the current or preceding calendar year.
Assembly Bill (AB) 147 amends the definition of “retailer engaged in business in [the] state” to include any retailer that, in the preceding or current calendar year, has more than $500,000 in total combined sales of tangible personal property for delivery in California. As a result, sellers that do not have a physical presence in California but satisfy the $500,000 threshold are now treated as retailers engaged in business in the state, and are thus required to collect and remit sales and use tax on California sales of tangible personal property. The remote seller provisions under AB 147 take effect immediately and apply retroactively as of April 1, 2019. AB 147 replaces the current administrative guidance issued by the California Department of Tax and Fee Administration (DTFA), which had imposed a threshold of $100,000 of sales or 200 transactions, effective April 1, 2019.
AB 147 sets forth California’s Marketplace Facilitator Act, which will become effective on October 1, 2019. Under the Marketplace Facilitator Act, a marketplace facilitator that satisfies the $500,000 threshold (or otherwise has nexus in the state, e.g., physical presence) is treated as a retailer engaged in business in the state and, thus, is required to collect sales and use tax on retail sales of tangible personal property that it facilitates on behalf of other marketplace sellers. While the definition of “marketplace facilitator” appears to be broad, certain entities are specifically carved out of the collection and remittance requirements placed on marketplace facilitators. In particular, internet websites that advertise tangible personal property for sale but neither communicate offer and acceptance between the buyer and seller of the tangible personal property nor process the payment are deemed to not be “facilitating a sale,” and thus are not subject to the collection and remittance requirements under the Marketplace Facilitator Act.
The US Supreme Court’s decision in South Dakota v. Wayfair created the impetus for California, and other states, to propose and enact economic nexus standards for sales and use tax. In Wayfair, the US Supreme Court rejected the physical presence requirement for imposing state sales and use tax obligations, thus giving states the ability to impose sales and use tax collection and remittance requirements on out-of-state sellers. While the legislation in the majority of other states conforms to South Dakota’s economic nexus thresholds—$100,000 in sales or 200 separate transactions made in the applicable state—California has adopted a single higher economic threshold of $500,000 in sales.
In addition to enacting a single higher economic nexus threshold, AB 147’s marketplace facilitator provisions are distinguishable from most other states’ legislation in a few key ways. For starters, the collection and remittance requirements placed on marketplace facilitators are limited to retail sales of tangible personal property. Additionally, in comparison to other states’ legislation, AB 147 provides somewhat broader liability relief provisions applicable to marketplace facilitators that fail to collect and remit the correct amount of sales and use tax.
However, unlike many other states’ marketplace facilitator legislation, AB 147 does not include two key provisions that are beneficial to marketplace facilitators. First, AB 147 fails to include a provision that prohibits consumer class actions against marketplace facilitators for over-collection of sales and use tax. Second, AB 147 does not include contractual workaround provisions, so it appears that marketplace facilitators do not have the ability to contract with marketplace sellers regarding compliance with the sales and use tax collection obligations under AB 147.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Cosimo A. Zavaglia
 A “marketplace facilitator” is defined as a person who contracts with marketplace sellers to facilitate for consideration, regardless of whether deducted as fees from the transaction, the sale of the marketplace seller’s products through a marketplace operated by the person or a related person who does both (1) and (2) below.