California Department of Tax and Fee Administration Finally Initiates Formal Regulatory Process for Proposed Revisions to Regulation 1684.5, Marketplace Sales

In the aftermath of the decision in South Dakota v. Wayfair, Inc. (2018) 138 S.Ct. 2080 (“Wayfair”), states across the country have implemented new rules and regulations regarding the collection of use tax from out-of-state taxpayers that sell tangible personal property using the internet.  California’s agency responsible for the administration and collection of sales and use tax, the California Department of Tax and Fee Administration (“CDTFA”), initially promulgated Regulation 1684.5, Marketplace Sales, as an emergency regulation under Assembly Bill No. 147 (“AB 147”) (Stats. 2019, ch. 5), the Marketplace Facilitators Act.  The California Legislature has subsequently amended portions of the statutory language.

Since the initial promulgation of Regulation 1684.5, which became operative June 29, 2020, the CDTFA has held two interested parties’ meetings (“IPM”) to solicit feedback on potential amendments to the regulation.  On January 26, 2022, the CDTFA held the latest IPM on this regulation where the agency proposed numerous amendments to the regulation’s language, including a new statement that a taxpayer “is not required to provide payment processing services to be a marketplace facilitator.”  Such language could prove to be burdensome on taxpayers who may not have the means or ability to collect and remit use tax from customers as they do not handle payments from buyers.

Interested parties provided comments in early 2022 to push back on the proposed amendments but were unsuccessful in convincing the CDTFA to alter its course.  Thus, the CDTFA issued a notice on November 17, 2022, that it is proposing the adopt the amendments to the regulation through the formal regulatory process.  That formal process allows for written comments to be received by January 3, 2023, and the potential for a public hearing if one is requested in writing no later than 15 days before the close of the written comment period or December 19, 2022.

The proposed amendments to Regulation 1684.5 could add additional compliance obligations for “marketplace facilitators,” as well as other taxpayers who initially may have presumed that they were not subject to the new use tax collection obligation under the former regulatory language.

If you have any questions about Regulation 1684.5 or the regulatory process, please contact our dedicated team of attorneys today.