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What To Know About Certain Tax Obligations In California



What To Know About Certain Tax Obligations In California

Are you a remote seller making sales into California through a marketplace seller like Amazon? Do you have inventory within the state?

What about remote workers? Do you have any employees that are now working from home across state lines?

If you answered yes to any of the above questions, I encourage you to keep reading!

Income Tax Obligations From Inventory

California’s Franchise Tax Board (FTB) recently sent out notices to online merchants demanding income tax returns, part of a larger effort to collect taxes from remote sellers with inventory within the state. While in-state businesses have received similar notices for a number of years, the recent focus on out-of-state retailers may trace back to the 2018 Wayfair decision and the implementation, and enforcement of, Wayfair-related legislation within California.

For a breakdown of South Dakota v. Wayfair and the impact it has had over the last two years, please click here.

How Are Marketplace Sellers Impacted Specifically?

Unlike remote sellers that make sales independently, and as a result, manage their own inventory, marketplace sellers may find these income tax obligations to be an unpleasant surprise. This includes retailers who make sales through Amazon’s Fulfilled By Amazon (FBA) platform. Amazon is notorious for moving inventory without informing sellers, sometimes even into new states without the seller’s knowledge.

As a result, marketplace sellers may be faced with new tax obligations in California they were previously unaware of if they meet certain annual thresholds.

While this may seem like an unfair reach by the FTB, we remind our readers that having inventory in the state (even if you didn’t necessarily know you had inventory in CA), constitutes physical presence – and creates nexus for both sales tax and income tax purposes. It always has. The difference is the FBA program has now presented taxpayers with a challenge they weren’t expecting. The rub is many participants in the FBA program don’t know (or didn’t previously know), where exactly their inventory was being stored, and likely didn’t realize that it created a physical presence for them in California. Or in any other state Amazon stored the seller’s inventory. California is getting some headlines about this now, but stay tuned for this shoe to drop in other states as well.

For a breakdown of marketplace facilitation, please click here.

Tax Obligations From Remote Workers

On the other hand, despite the crackdown on marketplace sellers, California has shown leniency when it comes to tax obligations created by remote workers. Of course, this is specific to remote workers who have been forced to shelter in place due to the pandemic, but the recent guidance from the FTB has been a relief to many companies that were unsure how the extended need for remote workforces would impact tax obligations.

As stated on the FTB website, “California will not treat an out-of-state corporation whose only connection to California is the presence of an employee who is currently teleworking in California due to Executive Order N-33-20 as being actively engaged in a transaction for the purposes of financial or pecuniary gain or profit.”

This means remote workers alone will not result in a business being classified as  “doing business” within the state. However, if a business has other ties to California, which already meet the state’s minimum thresholds for property, payroll or sales, it will be considered to be conducting business within the state.

Do You Have Questions About Your Tax Obligations In California?

Contact Monika Miles And Team.

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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