California Enacts Marketplace Nexus Provisions, Changes Economic Nexus Threshold

California has enacted legislation with marketplace nexus provisions and a change to the state’s economic nexus threshold.

Effective October 1, 2019, a marketplace facilitator is considered the seller and retailer for each sale facilitated through its marketplace for purposes of collecting and remitting California sales tax if:

• The marketplace facilitator is registered or is required to register with the California Department of Tax and Fee Administration; and
• The marketplace facilitator facilitates a retail sale of property by a marketplace seller.

For purposes of determining the total combined sales of tangible personal property (TPP) for delivery in California:

• The marketplace facilitator shall include all sales of TPP for delivery in California, including sales made on its own behalf and by all related persons and sales facilitated on behalf of marketplace sellers.
• The marketplace seller shall include all sales of TPP for delivery in California, including sales made on its own behalf and sales facilitated through any marketplace facilitator’s marketplace.

Note that a marketplace seller should register with the Department, as required, for retail sales made on its own behalf and not facilitated through a registered marketplace facilitator.

Per the legislation, “Marketplace facilitator” means 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 and who does both of the following:

• Directly or indirectly, through one or more related persons, engages in any of the following:
  • Transmitting or otherwise communicating the offer or acceptance between the buyer and seller.
  • Owning or operating the infrastructure, electronic or physical, or technology that brings buyers and sellers together.
  • Providing a virtual currency that buyers are allowed or required to use to purchase products from the seller.
  • Software development or research and development activities related to any of the activities described in the next set of bullet points, if such activities are directly related to a marketplace operated by the person or a related person.
• Directly or indirectly, through one or more related persons, engages in any of the following activities with respect to the marketplace seller’s products:
  • Payment processing services
  • Fulfillment or storage services
  • Listing products for sale
  • Setting prices
  • Branding sales as those of the marketplace facilitator
  • Order taking
  • Providing customer service or accepting or assisting with returns or exchanges

Marketplace includes physical and electronic places including stores, booths, internet websites, catalogs, television or radio broadcast or dedicated sales support applications.

Marketplace facilitator excludes a “delivery network company” which is a business entity that maintains an Internet website or mobile application used to facilitate delivery services for the sale of local products from businesses such as kitchens, restaurants, grocery stores, retail stores, convenience store or other types of business.

“Marketplace seller” means a person who has an agreement with a marketplace facilitator and makes retail sales of TPP through a marketplace owned, operated, or controlled by a marketplace facilitator, even if that person would not have been required to hold a seller’s permit or permits, or required to collect the tax, had the sale not been made through that marketplace.

If a marketplace facilitator demonstrates to the satisfaction of the department that it has made a reasonable effort to obtain accurate and complete information from an unrelated marketplace seller about a retail sale and that the failure to remit the correct amount of tax was due to incorrect or incomplete information provided by the seller, then the facilitator shall be relieved of liability for the tax for that retail sale. This does not apply if the facilitator is the retailer making the sale on its own behalf or if the facilitator and marketplace seller are related. When a marketplace facilitator is relieved of liability for the tax on a retail sale, the marketplace seller is considered the retailer for that retail sale.

A marketplace facilitator will be relieved of the tax on retail sales facilitated through its marketplace if the marketplace facilitator demonstrates to the satisfaction of the department all of the following:

• The retail sales were facilitated for a marketplace seller prior to January 1, 2023, through a marketplace of the marketplace facilitator.
• The marketplace facilitator is not the marketplace seller.
• The marketplace facilitator and the marketplace seller are not related.
• The failure to collect sales and use tax was due to a good faith error other than an error in sourcing the sale pursuant to the Transactions and Use Tax Law.

To the extent that a marketplace facilitator is relieved of liability for collection of sales and use tax, the marketplace seller for whom the facilitator has facilitated the retail sale is also relieved of liability, unless the marketplace seller is the retailer for those retail sales. The department may determine the manner in which a marketplace facilitator or marketplace seller shall claim the liability relief. The liability relief shall not exceed the following percentage of the total sales and use tax due on sales facilitated by a marketplace facilitator for marketplace sellers, which sales shall not include sales by the facilitator or persons related to the facilitator:

• For sales facilitated during the fourth quarter of 2019 or during the 2020 calendar year, 7%
• For sales facilitated during the 2021 calendar year, 5%
• For sales facilitated during the 2022 calendar year, 3%

Notwithstanding Section 6041, a person that is a delivery network company is not a marketplace facilitator for purposes of the legislation.

Effective April 1, 2019, the legislation changes California’s economic nexus threshold to be $500,000 (previously $100,000 or 200 or more separate transactions).  The legislation amends the definition of “retailer engaged in business in this state” to include any retailer that, in the preceding or current calendar year, has total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer that exceed $500,000. This amendment does not have a retroactive effect. The economic nexus threshold is also applicable for purposes of local use taxes.

The department may, in its discretion, relieve a retailer engaged in business in California from certain penalties and interest, if all of the following requirements are met:

• The retailer must be registered on or after April 1, 2019, as a retailer engaged in business;
• The total combined sales from the retailer and all persons related to the retailer, within the preceding 12 months, of TPP in California or for delivery in California does not exceed $1,000,000;
• The retailer was not previously registered, or required to be registered, with the department;
• The retailer’s failure to collect and remit use tax was due to a good faith error and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect;
• The retailer is not a marketplace facilitator; and
• Any other factors as deemed necessary by the department.

For purposes of the legislation, a person is related to another person if both persons are related to each other pursuant to Section 267(b) of Title 26 of the United States Code and the regulations thereunder. (Act 5 (A.B. 147), Laws 2019)