California had a busy third quarter, as regulators expanded sales tax language and clarified tax policies for cannabis businesses, while a court upheld state tax guidance and an extended tax deduction for victims of natural disasters was signed into law.
The California Department of Tax and Fee Administration had issued an emergency regulation in 2020 establishing sales tax collection and remittance requirements for marketplace facilitators. This regulation became permanent on Aug. 18, 2023, and largely maintains the language put into effect during the Covid-19 pandemic.
This isn’t a mere duplication—there are changes that enhance the regulation’s precision and effectiveness, most notably a comprehensive definition of “marketplace facilitator.”
A marketplace facilitator is considered to be a seller and retailer for each sale made to determine whether it has a sales tax filing obligation in California. As such, marketplace facilitators are subject to the state’s $500,000 sales threshold for determining whether they have economic nexus with California for income tax filing requirements.
The expanded term now applies to activities that make it possible or easier to sell products through the marketplace. Another example surrounds the increase in facilitation activities and listing them for sale.
Gross Receipts Tax
San Francisco’s city budget, enacted on July 26, postponed increases to the gross receipts tax until 2025. This provides much-needed relief to businesses, allowing them more time to recover and stabilize in the wake of recent economic challenges in the city and state.
The budget also introduces an opportunity for businesses to open in San Francisco between Jan. 1, 2023, and Dec. 31, 2027. Forward-thinking entrepreneurs and enterprises can benefit from a substantial credit against their gross receipts tax liability that can reduce their tax burden and increase their growth and success.
To qualify, a business and any affiliated entities must not have had a physical location within San Francisco for the three years before opening an establishment in the city. The success of this move within the city limits could trickle into other California cities that are struggling to retain small businesses.
Tangible Personal Property
On Aug. 24, the California Superior Court for San Francisco County ruled in favor of the state in American Catalog Mailers Association v. Franchise Tax Board. The case involved P.L. 86-272, a 1959 federal law detailing the limits of state and local taxation of income from sales of tangible personal property if those sales solely relate to the solicitation of authorized orders shipped from out of state.
The California FTB had released state guidance in response to P.L. 86-272 that followed the general guidelines of the federal requirements. The court said it couldn’t determine whether the FTB guidance was lacking because there were no supporting facts or substantive arguments regarding post-sales assistance and internet cookies provided, and because ACMA brought hypotheticals into the argument.
This leaves the possibility that another contender could challenge the state’s take on P.L. 86-272 regarding internet solicitation and sales and have it overturned or amended.
Cannabis Taxes
On July 1, the California Department of Tax and Fee Administration released information about taxing cannabis and cannabis product deliveries to encompass sales, use, and excise taxes. According to its website, “retail sales of cannabis, cannabis products, and any other tangible personal property (items) in California are generally subject to sales and use tax (tax) unless the law provides a specific exemption.”
The statewide sales and use tax rate is 7.25%, but overall tax rates can be higher when the district tax applies. Business owners have the responsibility of collecting and remitting the complete tax amount, which encompasses any relevant district taxes, when delivering to customers in areas subject to district taxes.
Generally, the relevant district tax rate corresponds to the applied rate at the business’s physical location. However, when delivering to customers, it’s imperative to collect, accurately report, and remit the district tax rate that’s in effect at the precise location where the items are delivered. This should assist with the tax rate in the cannabis industry and turn around the seven straight quarter decline in excises taxes and the industry’s current economic crisis.
Disaster Loss Deduction
On Sept. 30, Gov. Gavin Newsom (D) signed S.B. 264, extending the disaster loss deduction’s sunset date by five years, to Jan. 1, 2029. The extension will help the small businesses in California benefit in the wake of a natural disaster loss.
The stated deduction follows federal law and allows those in California who have suffered a loss from an earthquake, fire, or flood to deduct the loss amount incurred in that year on their state tax return. This deduction provides for automatic disaster loss relief for any disaster occurring in a city or county that is proclaimed by the governor to be in a state of emergency.
The case is: American Catalog Mailers Association v. Franchise Tax Board, Cal. Super. Ct., CGC22601363, Decision 8/24/23.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Allison Soares is a tax attorney at Vanst Law who focuses on audits, collections, appeals, international disclosures, and all other tax problems.
Lauren Suarez is an attorney at RJS Law who has been practicing tax law for almost 10 years. She has a wide array of knowledge in federal and state tax controversy matters.
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