California Sales Tax Collectors to Target Online Merchants

A new California sales tax law will require out-of-state online retailers to pay sales tax in California if they do substantial business with consumers in the state.

Previously, Internet merchants were only required to collect California sales tax if they maintained a physical presence in the state, such as a store or distribution center. As a result, many online merchants without physical ties to the state were able to avoid collecting sales tax on purchases from California customers, which some believe gave them an unfair advantage over businesses that are physically located in the state.

Businesses affected by the new law include those that sell more than $1 million in goods per year to people in California and make more than $10,000 annually in sales as a result of referrals from affiliates in California.

In its first year alone, state officials expect the new enforcement effort to generate an extra $317 million in sales tax. That figure is expected to grow in future years as consumers continue to do more of their shopping online. Online retailers in California currently charge between 7.25 and 9.75 percent, depending on the buyer's location. However, the tax rate could increase if voters approve a proposed sales tax increase that is on the ballot for November 2012.

In preparation for the new law, the Los Angeles Times reported that California officials are sending letters to over 200 retailers, notifying them that they may be required to collect sales tax from their customers in California. While it remains to be seen how many online businesses will be affected, some estimates put the number in the thousands. The state's tax collection agency, the California Board of Equalization, plans to spend $10 million over the next three years to hire dozens of new auditors, attorneys and other employees to identify out-of-state businesses that should be paying California sales tax and take action against non-compliant companies.

While some California residents lament the new law as the end of a "free ride" of sorts, state law has technically required consumers to pay sales tax on Internet purchases all along - but until now buyers were responsible for tracking their purchases and remitting sales tax payments independently for purchases from out-of-state websites. In addition to cracking down on Internet merchants, the California Board of Equalization also plans to increase its efforts to educate California consumers about their legal obligation to pay sales tax on their purchases, even those that are not taxed automatically.

Reactions among business are also mixed. Although the new law may prove detrimental to some out-of-state online merchants, who will no longer have the advantage of tax-free pricing, it may benefit brick-and-mortar businesses in California by reducing unfair competition.

Business owners and individuals who are facing tax audits or have questions about their tax liability in California should speak to an experienced tax attorney to learn more about their rights and responsibilities under state and federal tax laws.