California Economic Nexus: Threshold and Rules

The United States Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. changed the landscape of sales tax. Before this ruling, states could only require businesses to collect sales tax if they had a physical presence in that state. The Wayfair decision removed this physical presence requirement, allowing states to impose sales tax collection duties on remote sellers based on their economic activity, a concept known as economic nexus. Following this decision, California enacted its own laws establishing specific criteria for when a remote seller is required to register, collect, and remit sales tax, which determine when an out-of-state business is treated as a retailer in the state.

Determining if You Have Economic Nexus in California

A remote seller establishes economic nexus in California when their total combined sales of tangible personal property for delivery into the state exceed $500,000. This threshold is not based on the number of transactions, but solely on the total sales value. A business must look at its sales during either the preceding or the current calendar year to determine if it has met this monetary criterion. Once the $500,000 threshold is crossed in a calendar year, the obligation to register and collect tax begins for the remainder of that year and for the entire following calendar year.

The calculation of the $500,000 threshold includes the gross receipts from all sales of tangible personal property delivered into California, including both retail and wholesale transactions. This includes sales made directly by the retailer as well as sales made by all persons related to the retailer, such as affiliates or subsidiaries. Businesses must aggregate all these sales channels to accurately determine if they have surpassed the nexus threshold.

This economic nexus standard applies specifically to sellers who do not have a physical presence in California. A physical presence, which includes having an office, warehouse, or employees in the state, would have already created a sales tax obligation under pre-existing rules. The $500,000 threshold is a separate test aimed at remote sellers whose only connection to the state is through their economic activity.

The Role of Marketplace Facilitators

California law defines a “marketplace facilitator” as an entity like Amazon or Etsy that operates an online platform and facilitates retail sales for third-party sellers. A “marketplace seller” is the third-party business that uses the platform to sell its products. Under the Marketplace Facilitator Act, the marketplace facilitator is considered the retailer for tax purposes. This means the facilitator, not the individual marketplace seller, is required to collect and remit California sales tax on all sales made through its platform, provided the facilitator itself meets the $500,000 economic nexus threshold.

Even though the facilitator handles the tax on marketplace sales, those sales still count toward the individual seller’s own $500,000 economic nexus threshold. A business must track its total California sales, including those made through a marketplace, to determine if it has an independent registration requirement.

If a business sells exclusively through marketplace platforms where the facilitator collects and remits the tax, it does not need to register for a California seller’s permit. If the business also makes direct sales into California through its own website, it must evaluate their direct sales combined with their marketplace sales. If the total crosses the $500,000 threshold, the seller must register to handle tax on their direct sales.

Information and Documents Needed for Registration

Before beginning the online registration process for a California seller’s permit, a business should gather all necessary information. The specific requirements can vary based on the business structure, but certain core pieces of information are consistently needed. For nearly all business types, a Federal Employer Identification Number (FEIN) is required, though sole proprietors without employees may use their Social Security Number (SSN). You will need to provide the full legal name of the business as well as any “Doing Business As” (DBA) name.

Applicants must also provide specific details about their business operations. This includes identifying the business’s primary activity using a North American Industry Classification System (NAICS) code. You will also need to state the date of your first sale of tangible personal property delivered into California, as this establishes the start date of your tax obligation. The registration process also requires information about the individuals who own and operate the business, including names, addresses, and ownership percentages for all partners or corporate officers.

The Registration and Filing Process

Once a business determines it has economic nexus, the next step is to register for a seller’s permit through the California Department of Tax and Fee Administration (CDTFA) website. The online portal guides applicants through the registration. After submitting the application, the CDTFA will process the information and, upon approval, issue the seller’s permit. With the permit, the CDTFA will also assign a filing frequency for sales and use tax returns, which can be monthly, quarterly, or annually based on the volume of taxable sales.

The ongoing obligation is to collect the correct sales tax rate for each transaction. California has a statewide base sales tax rate of 7.25%, but the total rate varies by location due to district taxes. Sellers must use the buyer’s delivery address to determine the precise combined rate, which includes the statewide rate plus any applicable county, city, and special district taxes.

Filing the sales and use tax return by the assigned due date is the next step. The return details total gross sales, taxable sales, and the amount of sales tax collected. The final step is to remit the collected tax to the CDTFA for each reporting period.