California Department Of Tax Fee Administration Amends its “Collection of Use” Tax Regulation (Part 2)

California Department Of Tax Fee Administration Amends its “Collection of Use” Tax Regulation (Part 2)

If you’ve been following along with our blogs, you know that we talked about some new amendments taking place under California Sales and Use Tax Regulation 1684, “Collection of Use Tax by Retailers”. In the first part of our blog, we discussed how California implemented on April 1, 2019 an economic nexus threshold for retailers in addition to the longstanding physical nexus threshold. The State now requires out of state sellers to register and collect use tax in California as soon as they exceed $500,000 of sales of tangible personal property in either the preceding or current calendar year.

In the first blog we focused on three examples from the amended regulation for when economic nexus would be triggered for an out-of-state retailer. In this second part of the blog we will talk about the circumstances that will allow out-of-state retailers to discontinue their obligation to collect and report use tax to California. In other words, when will California no longer require an out-of-state retailer to hold a Certificate of Registration – Use Tax and to collect and report use tax?

The requirement to report sales or use tax in a state does not stop as soon as a retailer physically leaves a state or when it drops below a state’s economic nexus threshold. The nexus, whether it is physical or economic, lingers for a period of time; states refer to this type of nexus as “trailing nexus”. Trailing nexus varies from state to state, which makes it a good subject for future blogs, but in this blog we will focus on California’s trailing nexus policies.

California’s trailing nexus position was stated in Annotation 220.0275, it stated,

“The trailing nexus period generally consists of the quarter in which the retailer ceases the activities that had caused it to be a ‘retailer engaged in business’ in California, as well as the entire quarter that follows. Depending on the facts and circumstances specific to each retailer, the period of trailing nexus may be shorter or longer than the general “quarter-plus-a-quarter approach.”

The amended Regulation 1684 does not specifically use the term “trailing nexus” but it does address through four examples when an out of state retailer is no longer required to remain registered to collect and report California’s use tax. You will see from the direction provided in the amended regulation that Annotation 220.0275 provides a different timeline than the amended Regulation 1684. We will be watching to see if Annotation 220.0275 is amended or possibly deleted.

Amended Regulation 1684(e)(3) states,

“A retailer is not required to remain registered on January 1 of any subsequent calendar year if:

On that date and at all times during the preceding calendar year, the retailer does not have a physical presence in this state sufficient to establish a substantial nexus with this state for purposes of the Commerce Clause of the United States Constitution; and
During the calendar year, the retailer’s total combined sales of tangible personal property for delivery in this state by the retailer and all persons related to the retailer did not exceed the five hundred thousand ($500,000) threshold…”
Now, let’s look at the examples in the regulation so that we can apply the language of the regulation and better understand when trailing nexus will end in California:

First example: An Idaho retailer (“Ida-Widget”), with no physical presence in California in 2018 through 2021 sells tangible widgets through its website to California consumers. Ida-Widget’s total combined sales exceeded $500,000 during 2018 but did not pass the threshold in 2019, 2020 and 2021. So, Ida-Widget will be required to continue its registration for calendar year 2019 and collect use tax on its 2019 sales into California even though it is no longer making sales of more than $500,000. However, Ida-Widget is allowed to close its Certificate of Registration – Use Tax on and after January 1, 2020 and stop collecting California’s use tax. This is because Ida-Widgets sales in the year preceding 2020 did not exceed $500,000 and they did not exceed $500,000 in the year 2020.

Second Example: A Wyoming retailer (“Wyo-Gizmo”), like Ida-Widget had no physical presence in California in 2018 through 2021. Wyo-Gizmo had less than $500,000 in total sales of tangible gizmos delivered to California customers in 2018, 2020 and 2021. But, it made more than the $500,000 threshold in 2019. So, Wyo-Gizmo is required to register and collect use tax in 2019 and 2020, but may close-out its Certificate of Registration – Use Tax permit and stop collecting use tax for sales in 2021 so long as the sales are below the $500,000 threshold. Remember – the requirement to register and collect applies to retailers that have more than $500,000 in sales for the current and preceding calendar years; Wyo-Gizmo’s obligation in 2020 is due to its 2019 sales that exceed the threshold.

Third Example: A Missouri retailer (“Mo-Doodad”) has a physical location in California and also uses its website to make online sales to California customers. Mo-Doodad decided to close its place of business in California on November 1, 2019 and moved back to Missouri. Mo-Doodad continues to make sales of doodads to California customers through its website, but Mo-Doodad had less than $500,000 in sales of doodads in calendar years 2020 and 2021. So, the application of both sections A and B of Regulation 1684(e)(3) require that Mo-Doodad report California use tax in 2019 and 2020. It can close its Use Tax permit on January 1, 2021 because it does not have more than $500,000 in sales into California for both the preceding (2020) and current (2021) calendar years and it had no physical nexus in all of calendar year 2020.

Before diving into our final example, we will look at a caveat that was added to Regulation 1684(e)(4), it states, in part,

“If a retailer is not required to remain registered…the retailer may, close its Certificate of Registration – Use Tax … and stop collecting use tax after its certificate is closed. However, the provisions of the regulation continue to apply to a retailer that closes its Certificate of Registration – Use Tax, and a retailer should not close its certificate if it anticipates that it will be required to re-register with the Department during the current calendar year.”

Let’s look at an example of this:

Fourth Example: An Oregon retailer (“Ore-A-Thingamabob”) has no physical presence in California in calendar years 2018 through 2021. Ore-A-Thingamabob’s total combined sales for delivery to California customers are as follows: $450,000 in 2018; $600,000 in 2019; and, $490,000 in 2020. So, based on what we’ve learned from the first three examples we know that Ore-A-Thingamabob can close-out its use tax permit on January 1, 2021 because its sales in the preceding calendar year (2020) are less than the $500,000 threshold.

However, what if we add the fact that Ore-A-Thingamabob anticipates that its thingamabob sales are going to be even more than $500,000 in 2021 because of a new advertising campaign that they will introduce: should they close out the use tax permit? Probably not, according to the amended regulation.

We hope these examples from this blog and the previous blog about the amended Regulation 1684 will help you to understand when you are and aren’t required to collect and report California’s use tax. We will be watching for direction from other states so that we can keep you informed about your economic nexus requirements throughout the United States. We are looking for you to stay informed and stay well.

Have a question? Contact Monika Miles.


Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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