United States: California Accidentally Posts Draft Tax Collection Rules For Online Retailers -- Legal Challenges Possible If Draft Rules Are Adopted

Last Updated: August 10 2018
Article by Shail P. Shah, Mike Shaikh and Yoni Fix

At a Glance...

California briefly posted online a draft notice containing new use tax collection rules for retailers, indicating that it may imminently adopt use tax nexus thresholds similar to South Dakota's. If California decides to adopt new nexus thresholds via notice, such adoption may be subject to legal challenges by taxpayers.


The California Department of Tax and Fee Administration (CDTFA) inadvertently posted on its website a draft notice containing new tax collection rules for retailers, indicating that California may adopt use tax collection thresholds for remote vendors similar to the thresholds adopted under South Dakota's law effective August 1, 2018. In response to the recent U.S. Supreme Court decision in South Dakota v. Wayfair, Inc.,1 the draft notice stated that certain retailers are required to register with the CDTFA and to collect California use tax starting August 1, 2018, if they meet one of the following thresholds during the preceding or current calendar year:

  1. The cumulative sales price of the retailer's sales of tangible personal property for delivery in California exceeds $100,000, or
  2. The retailer sold tangible personal property for delivery in California in 200 or more separate transactions.

The draft notice continued to state the following:

As a result of the Wayfair decision, a retailer may now have a substantial nexus with California without having a physical presence in the state. Also, federal law now permits California to begin requiring retailers to collect use tax if the retailers have similar levels of sales activity in this state as those in the South Dakota law, regardless of whether they have a physical presence in California....
There will be no change in the registration or collection obligations of retailers that were already required to collect California use tax prior to the Wayfair decision.

The CDTFA has since removed the draft notice from its website, and a CDTFA representative has said that the document was an unofficial, internal-only document that was inadvertently placed on the CDTFA website. The CDTFA's representative added that the draft was written prior to the Wayfair decision and was not intended for publication, and that the CDTFA is currently evaluating its next steps in the wake of the Wayfair decision.

Current California law

Under current law, Revenue and Taxation Code Section 6203(a) provides that "every retailer engaged in business in this state" making non-exempt sales of tangible personal property for storage, use or other consumption in California shall collect California sales and use tax from the purchaser at the time of the sale.

Revenue and Taxation Code Section 6203(c) defines "retailer engaged in business in this state" to mean "any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty."

Unanswered questions and potential legal challenges

Although the CDTFA removed the draft notice, the notice may provide insight on California's next steps. While California continues to evaluate its place in the post-Wayfair landscape, several questions remain unanswered, such as the following:

1. Will California apply Wayfair retroactively?

The draft notice said that these new tax collection rules would be effective August 1, 2018. However, the draft notice did not expressly say whether the CDTFA will only apply the new nexus threshold rules prospectively or whether they could also be applied retroactively.

2. May California simply issue another notice to adopt new nexus thresholds?

If the CDTFA simply issues another notice adopting nexus thresholds similar to South Dakota's, the enforceability of such notice may come into question. Potential legal challenges to such notice may include:

  1. The notice constitutes an improper adoption of a regulation due to non-compliance with the procedural requirements of the California Administrative Procedure Act (APA).

    The APA establishes rule-making procedures and standards for state agencies in California. The requirements set forth in the APA are designed to provide the public with a meaningful opportunity to participate in the adoption of state regulations and to ensure that regulations are clear, necessary, and legally valid. State agencies that wish to adopt, amend, or repeal a regulation must comply with certain procedural filing, publishing, notice, and hearing requirements to allow the public an opportunity to participate.2

    Just last month, the California Superior Court granted summary judgment and an injunction in favor of the plaintiff on a matter involving California's attempt to circumvent the regulatory process outlined in the APA.3 The Thrivent case underscores the willingness of California courts to strike down broad rules of general applicability that do not go through the formal regulatory process.
  2. The new collection rules, under certain circumstances, may constitute a tax increase, which requires a two-thirds supermajority approval under California Proposition 26.

    California's Proposition 26 provides that the passage of any law that leads to an increase in tax for any taxpayer in California requires a two-thirds supermajority vote in the Legislature. While the notice posted by the CDTFA only imposed a use tax collection obligation on out-of-state sellers (i.e., the use tax obligation would shift from the consumer to the out-of-state seller under the notice), there may be indirect tax increases as a result of the new obligation. For example, under the notice an out-of-state seller would be obligated to collect use tax at the highest combined rate (state, local, and district) from its consumers for the sake of ease of compliance. Arguably this obligation may increase the use tax due on the out-of-state seller's sales to California consumers compared to a scenario in which the consumers continued to self-assess the use tax based on the applicable local rates. While uncertain, this type of an increase in the effective use tax rate imposed on sales by out-of-state sellers may require the CDTFA to obtain approval for the rule by a supermajority in the Legislature.


If California decides to adopt new nexus thresholds by mere notice, taxpayers will have several legal arguments available to challenge the enforcement of the new rules.


  1. 138 S. Ct. 2080 (2018).
  2. See Cal. Gov. Code 11340 et seq.
  3. See e.g., Thrivent Financial For Lutherans vs. Betty Yee, Case Number: CGC-15-548384 (Cal. Super. Ct. July 18, 2018) (California Superior Court granted summary judgment and an injunction in favor of a life insurer contesting California's unclaimed property handbook requirements as "regulations" not promulgated consistently with the APA).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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