Why $500K could be the highest exemption from online sales tax collections

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WASHINGTON -- California could join three other states in setting a $500,000 annual sales threshold for out-of-state online retailers to be required to collect sales tax.

Massachusetts, Ohio and Tennessee already have set that threshold, which is the highest among the states that have established one, according to the National Conference of State Legislatures.

As the nation’s most populous state with the largest economy, California could set the upper level benchmark for other large states such as Florida and New York that have not yet announced a sales tax remittance threshold.

“States are looking at this issue very carefully and will set their own thresholds based on what they believe constitutes economic presence,” Jake Lestock, policy specialist for state-federal relations at the National Conference of State Legislatures, said Monday.

“I think it’s safe to say that if some of the largest states in the country are looking at potentially setting a threshold at $500,000, it doesn’t seem likely any state will go above that,” he said.

Tax Notes reported Monday that the $500,000 threshold is part of draft legislative language that the California Department of Finance has circulated among stakeholders. The measure could be inserted by Gov. Jerry Brown into a so-called budget trailer bill.

The threshold would be five times as large as the $100,000 threshold the California Department of Tax and Fee Administration was considering in June.

A spokesman for that state department described the June document as “a draft” written prior to the June 21 U.S. Supreme Court decision on remote sales tax collection in South Dakota v. Wayfair, Inc.

“That was an unofficial internal-only document that was inadvertently placed on a test website,” Paul Cambra, a spokesman for the California Department of Tax and Fee Administration, said in an email Monday.

Fifteen states that have set their remittance thresholds at $100,000 or 200 annual transactions, which is the same as in South Dakota's 2016 law that was at issue in the high court case.

That 5-4 ruling that favored the state over out-of-state online retailers, overturned a longstanding requirement that a retailer must have a physical presence in a state before it can be required to collect sales tax.

The majority opinion written by Justice Anthony Kennedy signaled that South Dakota's statute that required online retailers to collect sales taxes from many online purchases may pass the test of not putting an undue burden on interstate commerce, but that that determination will be decided by a state court.

South Dakota is a member of Streamlined Sales and Use Tax Agreement and provides a small business exemption for retailers with less than 200 transactions or $100,000 in sales in the state.

Only six states have announced thresholds above $100,000 in annual sales.

Connecticut, Georgia and Mississippi have set their annual sales thresholds at $250,000 in addition to the $500,000 threshold set by Massachusetts, Michigan and Tennessee.

Four states, meanwhile, have set annual sales thresholds of only $10,000 for requiring e-commerce retailers to remit sales tax. Those states, according to the National Conference of State Legislatures, are Minnesota, Oklahoma, Pennsylvania and Washington.

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E-Commerce Online sales tax Government finance State and local finance SCOTUS Washington DC South Dakota California Massachusetts Ohio Tennessee