California Is Hunting for Income Tax from Out-of-State Sellers

October 29, 2020

Does your ecommerce business sell to customers in California? Then you may receive a notice from the state’s Franchise Tax Board warning you to file delinquent income tax returns.

California has started a new push to collect income tax from out-of-state merchants, as of October 2020.

The scope of the income tax notices is unclear, but they appear to be targeting online sellers who use third party services, such as Fulfillment by Amazon (FBA).

Read on to learn whether your ecommerce business needs to worry about California’s new income tax notices!

Do I need to pay income tax in California?

Even if your business is registered in another state, you may need to pay income tax to California (as well as sales and use tax) if you exceed a certain threshold for doing business in the state.

For tax year 2019, the threshold is $601,967 of sales into California or 25% of your total sales. You may also need to pay an $800 annual fee for doing business in California, depending on your business’s legal structure.

If you’re registered for sales tax in California but not income tax, you could be a prime target for the state’s new collection campaign.

Not sure about your state tax obligations? Our ecommerce tax attorneys can help you navigate the maze of state tax laws.

What happens if I receive an income tax notice from California?

If you receive an income tax notice from the California Franchise Tax Board, you’ll have 60 days to respond and file an income tax return. Otherwise, you’ll begin to accrue additional penalties and fees.

If you believe you have filed your California income taxes correctly and paid in full, you should still respond to the notice and provide proof. Want help navigating your options? Give our experienced tax attorneys a call.

Why is California sending income tax notices to online sellers?

The requirements for who must file and pay income taxes for California haven’t changed, but the notices being sent to out-of-state sellers are new.

California and several other states have been pushing to collect sales and use taxes from out-of-state sellers since 2018, following the results of the influential South Dakota v. Wayfair case.

California appears to be the first state to engage in a similar collection campaign for income taxes from online sellers.

California, Texas, and Florida have the highest populations in the country, so many online sellers do significant business in these states. That gives them a lot of clout when it comes to tax collection.

Keeping track of sales tax nexus can already present a major headache for ecommerce businesses. If other states begin to follow California’s lead when it comes to income tax, it would present a major challenge to some smaller sellers.

Some online sellers are pushing back against California’s tax collection efforts

The Online Merchants Guild, which represents ecommerce sellers, sued California in September for requiring out-of-state merchants to collect and remit sales tax on products sold through the FBA (Fulfillment by Amazon) program.

They’re also outspoken against California’s new income tax collection efforts.

Executive director Paul Rafelson called the income tax notices “complete nonsense.” He’s concerned about the future implications for ecommerce businesses.

“When you extrapolate it to 43 income tax states, it’s scary what it could mean,” Rafelson said to Bloomberg news. “If Amazon sellers have to pay income taxes in all of them, imagine the expense.”

Feeling lost? Speak to an ecommerce tax attorney

Ecommerce taxes can be a headache due to the constantly changing state laws. You may have to pay sales, use, and income taxes in multiple states based on sales volume or other requirements.

Spare yourself the headache (and risk!) of trying to figure it out alone. Call our experienced ecommerce tax attorneys to navigate your obligations, options, and risks.

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