Righting Wrongs: CA's Out-of-State Voluntary Disclosure Program.

• Author: Klasing, David W.
• Position: CA Tax

Taxing authorities--whether they be the IRS or one of the many California tax enforcement entities--are chiefly concerned with ensuring that taxpayers follow tax law, file their returns on time and pay the requisite amount of tax. In recognizing that some taxpayers make mistakes in the preparation and filing of their taxes, taxing authorities are willing to allow taxpayers to correct prior errors or omissions without many of the financial burdens typically associated with incorrectly following California tax law.

One of the most common situations that gives rise to the need for voluntary tax disclosure is out-of-state internet retailers in the wake of the Supreme Court's Wayfair ruling.

Out with the Old, In with the New

Earlier this year, the United States Supreme Court overturned Quill Corp. v. North Dakota, which was previously the controlling precedent with regard to placing sales tax burdens on out-of-state retailers with no physical presence in the state at issue. In South Dakota v. Wayfair, Inc., the Supreme Court rejected the notion that a state cannot require an out-of-state retailer to collect and remit sales tax simply because that retailer has no physical connection with the taxing state.

What does that mean for non-Californian online retailers that sell into California? Businesses that use platforms such as Amazon to act as a marketplace for their products are commonly referred to as third-party sellers. California's tax code specifically requires third-party sellers that have entered into agreements with companies such as Amazon to collect and remit sales tax on tangible property sold to individuals or businesses within California if their annual sales into California exceed $1 million and their sales through affiliates (such as Amazon) exceed 310,000 annually [Cal. RTC Sec. 6203(c)(5)(A)].

The Supreme Court's ruling in Wayjair solidifies California's authority to enforce the sales tax withholding requirements.

Correcting Past Noncompliance in a Post-Wayfair World

As state taxing authorities now have the weight of the U.S. Supreme Court behind them, they likely will be strictly enforcing the withholding and remittance of sales tax from out-of-state retailers and will engage in audits to ensure compliance. Many out-of-state third-party sellers are looking to come into compliance with the California sales tax withholding laws, but are looking to avoid paying penalties associated with their prior noncompliance.

RTC Sec. 6487.05...