California was already trying to wring more taxes out of online retailers months before the Supreme Court handed down a ruling that gave states permission to do so.
Last fall, more than 2,500 online retailers with out-of-state addresses received letters from the California Department of Tax and Fee Administration (CDTFA) informing them that they appeared to owe sales taxes here. It marked an escalation of the state's efforts to collect sales taxes from online retailers — and their customers — since the state in 2012 struck a deal that compelled e-commerce behemoth Amazon to begin collecting sales taxes in California.
CDTFA Director Nicolas Maduros told a Senate committee in April that the potential taxes from the companies that received the batch of letters could total hundreds of millions of dollars a year in revenue. "It's not an area we can afford to overlook," he said.
The Supreme Court's recent decision in South Dakota v. Wayfair could expand the playing field even further. The 5-4 ruling overturns a 1992 decision, Quill Corp. v. North Dakota, that allowed states to collect online sales taxes from sellers only if the seller has a physical presence in the state. States will be able to collect sales taxes from all online retailers, provided they meet criteria to be determined by each state.
The decision came as a victory to brick-and-mortar retailers, which are subject to state sales taxes and felt they were at a disadvantage to online retailers.
CDTFA spokesman Paul Cambra said this week that it's too early to tell how the ruling will play out. Maduros, at his confirmation hearing, told lawmakers they might need to pass a new law to empower the department to collect taxes from more out-of-state retailers. He estimated the state was missing out on about $1.8 billion in revenue from Internet retailers.
"The department is currently reviewing the court's opinion to determine next steps to support taxpayers," Cambra said.
The federal Government Accountability Office estimated that in 2017, governments could gain $8 billion to $13 billion if states were given the authority to collect from all remote sellers.
California has been able to collect taxes from online retailers that have a physical presence in the state. State tax collectors also ask people who purchase goods online to report what they buy and pay sales taxes, although few comply.
Companies that sell products through Amazon don't necessarily have to pay sales taxes. The Wayfair decision grants California the ability to collect both state and local taxes on all of Amazon's products.
Democrat Fiona Ma, a member of the Board of Equalization who is running for state treasurer, said the ruling helps brick-and-mortar retailers compete with their Internet counterparts. She doesn't expect that paying taxes will stop people from ordering online.
"The original rationale was that people order online to save sales tax," Ma said. "Now, I think it's for convenience. People are busy. They don't have time to drive down to their local Target to buy toilet paper. They'd rather call Amazon Prime and get it delivered."
Board of Equalization member George Runner, a Republican, said the state must be careful in how it carries out its new authority because confusing new tax laws could hurt entrepreneurs in other states. "These are frustrating tax laws that are frustrating to the taxpayer," he said. "As a result of the confusing tax laws, they don't know what to collect. That was my biggest frustration, and it still is."
The Board of Equalization used to oversee sales tax collection, but the Legislature stripped the agency of that power a year ago and handed it to the newly created CDTFA. Maduros made collecting taxes from online retailers a priority soon after he took office a year ago. He started by asking employees to look for online retailers that promised same-day delivery but were not registered to pay California taxes.
"Where retailers have a physical presence here, they should be collecting and remitting that use tax," he said.
Before the Supreme Court decision, Maduros said, some retailers responded to the department's letters by requesting permits. Others had attorneys respond. Their negotiations are ongoing. Online purchases make up about 9 percent of overall sales, according to May figures from the U.S. Census.
"It's not an area we can afford to overlook," Maduros said.
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