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

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 (the Out-of-State Voluntary Disclosure Program) was adopted to encourage out-of-state retailers to come forward and come into compliance with sales tax laws.

The California Department of Tax and Fee Administration administers the Out-of-State Voluntary Disclosure Program for businesses that:

* Are outside the state of California that have not been registered with the CDTFA;

* Are engaged in business in California (as defined in Sec. 6203, referenced above);

* Register voluntarily with the CDTFA;

* Have not been contacted by the CDTFA regarding its activities in California; and

* Had reasonable cause in failing to pay over the correct amount of tax (did not do so with the intent to evade taxes).

Out-of-state third-party sellers that take advantage of the Voluntary Disclosure Program benefit from the waiver of late filing and late payment penalties, as well as a reduced time limit (three years) for which the CDTFA may assess overdue use tax. Without the program, the CDTFA is within its right to assess overdue use tax for the eight previous tax years where appropriate. Program applicants also are able to receive a written opinion as to whether the CDTFA would approve their application based on the facts and circumstances presented anonymously.

Potential applicants and their tax professionals will need to work together to develop a description of the business and how it meets the criteria to participate in the program. This includes a detailed description of its business activities, specifically how products are marketed and sold to California customers. Finally, a description of the flow of goods to the customer after the order is placed must be provided.

Although third-party sellers have multi-state sales tax vendors available to them within the Amazon marketplace to automate the sales tax collection and remission process, going forward, future sales tax compliance does not correct prior noncompliance. Because the CDTFA's Out-of-State Voluntary Disclosure Program precludes applicants that have been contacted by the CDTFA with regard to their sales activity within California, applying for the program is a time-sensitive matter. As soon as the CDTFA inquires into an out-of-state third-party sellers' sales tax compliance, it's likely too late to take advantage of the benefits of the voluntary disclosure program.

by David W. Klasing, CPA, Esq.

David W. Klasing, CPA is the owner/operator of The Tax Law Offices of David W. Klasing. You can reach him at
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Title Annotation:CA Tax
Author:Klasing, David W.
Publication:California CPA
Geographic Code:1U9CA
Date:Jan 1, 2019
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