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Tax Issues in App Development
Rise of the Machines: Avoiding the Legal Pitfalls of App Development
Thursday, September 26, 2019 | 2:00 P.M. - 3:30 P.M. Eastern
Sponsored by: ABACLE
Presented by: Roger Royse
ericanbar.org | www.abacle.org
Roger Royse
• Roger Royse is the founder of the Royse
Law Firm. He is a frequent speaker and
active in several leadership roles in the
American Bar Association.
• He serves as Chair of the Tax Practice
Management Committee for the Tax Law
Section, as well as Vice Chair for the
Tax Section’s Tax Policy and
Simplification Committee.
• He is also a member of the Executive
Committee Taxation Section of the
California Lawyers Association.
• Roger wrote “Dead On Arrival,” a
practical guide for entrepreneurs and new
lawyers to avoid the legal mistakes that
can kill otherwise successful startups.
• Roger regularly advises domestic and
international startup and emerging growth
companies on formation, financing, and
ericanbar.org | www.abacle.org
Outline
1. Misclassification: Independent
Contractor vs. Employee
2. Managing Risk: What Are the Direct &
Indirect Costs
3. Strategies for Avoiding
Misclassification
4. Reporting
ericanbar.org | www.abacle.org
1. Misclassification:
Independent Contractor vs. Employee
ericanbar.org | www.abacle.org
The Story of Homejoy
• Used an algorithm to connect
homeowners with contract-for-hire
cleaners and to schedule visits
• Raised $40 million in venture
funding
• Treated its cleaners as independent
contractors, and not employees
• CEO said the “deciding factor” in
failure to raise money and failure
was worker classification lawsuits
(Recode July 17, 2015)
ericanbar.org | www.abacle.org
Employment Status: The Law
• The presumption is that the worker
is an Employee (Cal. Lab. Code
§3357)
• Different agencies/jurisdictions
have different tests
• IRS
• DOL/FLSA
• CA Common Law and EDD
• Statutory Employees
ericanbar.org | www.abacle.org
Employment Status: The Law
• IRS: The Control Test
• Behavioral Control
• Financial Control
• Type of Relationship
• DOL/FLSA: Economic Realities Test/Silk Factors
• Focus is on the degree of control the Company has over the
worker performing the service. The key inquiry is the right
to control not whether the Company actually exercises the
control.
• In July 2015, DOL issued administrative guidance and
explained that the test focuses on whether the worker is
economically dependent on the hiring entity or is in
business for herself/himself.
• CA Common Law/EDD: S. G. Borello & Sons, Inc. v Dept. of
Industrial Relations (1989) 48 Cal.3d 341
• This is a multi-factored test with the most significant
factor considered is whether the principal has control or
the right to control the worker as to the work done and the
manner and means in which it is performed.
• Statutory Employees
ericanbar.org | www.abacle.org
Dynamex Decision
• Dynamex Operations West, Inc. v.
Superior Court of Los Angeles adopts
a three-factor ABC test, which
presumes a worker is an employee
unless all of the following tests
are satisfied
• Worker is free from control and
direction of hiring authority
• Worker performs work outside the
usual course of the hiring
entity’s business, AND
• Worker is engaged in an
independently established trade,
ericanbar.org | www.abacle.org
Dynamex and Tax?
• Decision applies “for purposes of
California wage orders” (emphasis in
original), not for tax
classifications
• Worker may be classified differently
for different purposes
• Will the EDD use Dynamex and become
more aggressive?
• EDD has not stated that it will
apply Dynamex
ericanbar.org | www.abacle.org
AB-5
• California Assembly Bill 5 would
codify Dynamex in the Labor Code and
the Unemployment Insurance Code “For
purposes of the provisions of this
code and the Unemployment Insurance
Code, and for the wage orders of the
Industrial Welfare Commission…”
• Numerous carve-outs proposed
ericanbar.org | www.abacle.org
AB-5
• Uber, Lyft and DoorDash threatened
to spend $90 million on a 2020
ballot measure unless the
Legislature passes a new bill
allowing them to avoid classifying
drivers as employees
• California Labor Federation,
representing 1,200 unions with 2.1
million members, vowed to defeat the
effort (LA Times August 30, 2019)
ericanbar.org | www.abacle.org
2. Managing Risk:
What Are the Direct & Indirect Costs?
ericanbar.org | www.abacle.org
Direct Costs of
Misclassification Finding
• Unpaid back federal, state and local income tax
withholdings
• Unpaid back Social Security and Medicare contributions
• Unpaid federal and state unemployment insurance taxes
• Unpaid workers’ compensation premiums
• Unpaid back overtime compensation and/or minimum wages
• Overtime and Minimum Wage Penalties
• Unpaid work-related expenses
• Unpaid sick and vacation pay
• Waiting Time Penalties (Cal. Lab. Code §203)
• Cal. Lab. Code §226.3 (Failure to Provide Accurate Wage
Statements)
• $250 per employee per violation in an initial citation; $1,000 per
employee for each subsequent violation
• SB 459 (Cal. Lab. Code §226.8 & §2753)
• Willful misclassification – Penalties range from $5,000 - $15,000 PER
violation. If an entity is in engaged in a “pattern or practice” of
misclassification fines increase to $10,000 - $25,000 per violation
• Joint and Several Liability with Employer for knowingly advising
misclassification (exception for practicing attorneys and persons
advising his/her employer)
ericanbar.org | www.abacle.org
Direct Costs of
Misclassification Finding
• Attorney Fee Shifting Statutes
• Minimum Wage/Overtime (Cal. Lab. Code §1194)
• Nonpayment of Wages/Benefits (Cal. Lab. Code §218.5)
• Enforcement of Public Interest (Cal. Civ. Proc. Code §1021.5)
• Cal. FEHA Fees (Cal. Gov’t. Code §12965(b)
• Criminal Penalties
• Failure to procure workers’ compensation insurance (Cal. Lab. Code
§3700.5)
• Knowingly and Intentionally Violating Cal. Lab. Code §226 (Failure
to provide wage statements)
• Potential Insurance Premium Fraud
• Intentionally underreporting payroll or misclassifying workers
to avoid workers’ compensation premiums
• Example:
• T.B. Concrete – charged with 15 felony counts of submitting
false payroll reports and misclassifying employees to avoid
payroll taxes and workers’ compensation expenses. State claimed
that 111 (85% of the Company’s payroll) were underreported.
• Stop Orders and Penalty Assessments under Cal. Lab. Code
§3710.1
• PAGA Claims
• Allows plaintiffs’ attorneys to bring suit on behalf of individuals
as a stand-in for the attorney general in order to seek any civil
ericanbar.org | www.abacle.org
Indirect Costs of
Misclassification Finding
Short-Term Costs & Benefits
• Employers save around 30% on payroll and related
taxes by utilizing Independent Contractors
• Do not need to provide:
• Health Benefits
• Retirement Benefits
• Paid Time Off
• Employees have:
• Flexible Work Schedules
• Supplemental Income
• No Benefits
• PTO, Health or Retirement
• No Legal Protection
• No workers’ compensation or wage and hour law
protection
• No Job Security
ericanbar.org | www.abacle.org
Indirect Costs of
Misclassification Finding
Long-Term Costs & Benefits
• How is this new labor market impacting Company
culture?
• Potential Impact on Hiring – Who will join your
Company?
• Limited to No Training of Workers Classified as
Independent Contractors
•  Affects Quality Control
• Employee Loyalty
• Independent Contractors will work for competitors
• Risk of Trade Secret Theft
• Impact on Investor Funding
• Red flag in due diligence, concern with litigation
risk
Vs.
• Focused on financial benefits; want startups to keep
costs low
ericanbar.org | www.abacle.org
Indirect Costs of
Misclassification Finding
Litigation Costs
• Statute of Limitations
• Varies upon jurisdiction, generally 2-3 years
• No Waiver of Wage and Hour Law Claims in a
Release
• Many Releases include language directly asserting
that wage and hour law claims are not waived
• Can include language preventing collection of
monetary relief from wage and hour claims
• Attorney’s Fees
• Fee Shifting Statutes make litigating potentially
extremely expensive
• Liquidated Damages
ericanbar.org | www.abacle.org
3. Strategies for Avoiding Misclassification
ericanbar.org | www.abacle.org
Strategies for Avoiding
Misclassification
If the Company desires to utilize independent
contractors:
• Re-evaluate current independent contractors to ensure
status is still applicable.
• Remember status can change over time
• Draft an independent contractor agreement that
establishes real independence
• Structure the day-to-day work relationships to follow
the independent contractor agreement and be sure that
the daily activities reflect actual independence
• If status of a worker or group of workers looks like
a “close call” or falls into the “legal grey area,”
consider classifying as an employee (part-time,
temporary, etc.)
• Consider using a Staffing Agency or Workforce
management firm
• CAUTION – recent case law has held joint and
several liability for Company with staffing
agency/workforce management firm for indirect
ericanbar.org | www.abacle.org
Hybrid Worker Classification
“Dependent Contractor”
• Receives some but not all employee protections
• Canada
• Employers are required to provide the worker with
reasonable notice upon termination - Keenan
(c.o.b. Keenan Cabinetry) v. Canac Kitchens, a
Division of Kohler Ltd (“Canac”)
• Ultimate factors are: exclusivity and economic
dependence
• 80% or more of income from a single source
• Germany
• Worker that is economically dependent on his or
her job and has been working with one entity for
several years
• 50% of income from a single source
• “Minijobs” are permitted for part-time workers
where the worker earns no more than €450 per month
and the income is tax-free
ericanbar.org | www.abacle.org
Reporting
• IRC 6041A(a): 1099-Misc reporting of
payments of $600 or more in a trade or
business
• 6050W: 1099-K for payment settlement
agencies
• Applies if a Payment Settlement Agency
(PSE) makes a payment in settlement of a
reportable payment transaction
• PSE includes a third party settlement
organization (TPSO)
• A TPSO is a PSE in the case of a
third party network
• A TPSO is the central organization
that has the obligation to pay
ericanbar.org | www.abacle.org
1099-K Reporting
• in settlement of third-party payment
network transactions above the
minimum reporting thresholds of
• gross payments that exceed $20,000
AND
• more than 200 such transactions
• Caution:
• The IRS has issued several private
letter rulings stating that online
platforms and marketplaces have a
reporting requirement under 6050W.
ericanbar.org | www.abacle.org
1099-K Examples
• Service-recipient A, in the course of business,
pays $600 of fixed or determinable income to B, a
repairman, through a third party payment network.
B is one of a substantial number of persons who
have established accounts with Y, a third party
settlement organization that provides standards
and mechanisms for settling the transactions and
guarantees payments to those persons for goods or
services purchased through the network. Y is
responsible for making the payment to B. Under
paragraph (d)(4)(i) of this section, A is not
required to file an information return under
section 6041A(a) with respect to the transaction
because the transaction is a third party network
transaction that is subject to reporting under
section 6050W.
• 1.6041A-1(d)(4)(ii), Ex. 2.
ericanbar.org | www.abacle.org
1099-K Examples
• Restaurant owner A, in the course of business,
pays $600 of fixed or determinable income to B, a
repairman, through a third party payment network.
B is one of a substantial number of persons who
have established accounts with Y, a third party
settlement organization that provides standards
and mechanisms for settling the transactions and
guarantees payments to those persons for goods or
services purchased through the network. Y is
responsible for making the payment to B. Under
paragraph (a)(1)(iv) of this section, A, as payor,
is not required to file an information return
under section 6041 with respect to the transaction
because the transaction is a third party network
transaction that is subject to reporting under
section 6050W.
• 1.6041-1(a)(1)(v), Ex. 2.
ericanbar.org | www.abacle.org
Sales Tax Nexus
• South Dakota v. Wayfair, Inc. allows
states to tax remote sales
• Under prior law states could only
tax sales by businesses with a
physical presence in the state
• Under Wayfair economic activity in a
state — economic nexus — can trigger
a sales tax collection obligation,
including sales revenue, transaction
volume or both
ericanbar.org | www.abacle.org
Economic Nexus
• Most states now have an economic
nexus law or rule on the books
• States also tax remote sales based
on affiliate nexus and click-through
nexus
• Affiliate nexus is based on
certain relationships between the
remote seller and affiliated
entities such as parent-subsidiary
• Click through nexus is based on an
in-state person referring sales to
the out-of-state seller
usually through a website link
ericanbar.org | www.abacle.org
Marketplace Facilitators
• Some states require marketplace
facilitators to collect and remit
tax on behalf of third-party sellers
• Marketplace that contracts with
third party sellers to promote their
sale of goods and services through
the marketplace. Amazon is a
marketplace facilitator.
ericanbar.org | www.abacle.org
California
• An out-of-state retailer must register and
collect and remit California sales and use
tax if, in the preceding or current
calendar year, the retailer “and all
persons related to the retailer” have more
than $500,000 in total combined sales of
tangible personal property for delivery in
California.
• As of October 1, 2019, in-state
marketplace facilitators and out-of-state
facilitators that meet the $500,000
threshold must collect the tax due on all
sales made in the state through the
marketplace ( and not the marketplace
sellers)
ericanbar.org | www.abacle.org
For more information, contact
us.
Royse Law Firm, PC
www.rroyselaw.com
Silicon Valley
149 Commonwealth Drive
Suite 1001
Menlo Park, CA 94025
P: 650-813-9700
San Francisco
135 Main Street
12th Floor
San Francisco, CA 94105
P: 415-421-9700
Santa Monica
520 Broadway
Suite 200
Santa Monica, CA 90401
P: 424-238-3335
Orange County
135 S. State College Boulevard
Suite 200
Brea, CA 92821
P: 310-481-0125
ericanbar.org | www.abacle.org
Questions?
All attendees can submit questions
via the Q&A feature on the webinar
interface.

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Tax Issues in App Development

  • 1. ericanbar.org | www.abacle.org Tax Issues in App Development Rise of the Machines: Avoiding the Legal Pitfalls of App Development Thursday, September 26, 2019 | 2:00 P.M. - 3:30 P.M. Eastern Sponsored by: ABACLE Presented by: Roger Royse
  • 2. ericanbar.org | www.abacle.org Roger Royse • Roger Royse is the founder of the Royse Law Firm. He is a frequent speaker and active in several leadership roles in the American Bar Association. • He serves as Chair of the Tax Practice Management Committee for the Tax Law Section, as well as Vice Chair for the Tax Section’s Tax Policy and Simplification Committee. • He is also a member of the Executive Committee Taxation Section of the California Lawyers Association. • Roger wrote “Dead On Arrival,” a practical guide for entrepreneurs and new lawyers to avoid the legal mistakes that can kill otherwise successful startups. • Roger regularly advises domestic and international startup and emerging growth companies on formation, financing, and
  • 3. ericanbar.org | www.abacle.org Outline 1. Misclassification: Independent Contractor vs. Employee 2. Managing Risk: What Are the Direct & Indirect Costs 3. Strategies for Avoiding Misclassification 4. Reporting
  • 4. ericanbar.org | www.abacle.org 1. Misclassification: Independent Contractor vs. Employee
  • 5. ericanbar.org | www.abacle.org The Story of Homejoy • Used an algorithm to connect homeowners with contract-for-hire cleaners and to schedule visits • Raised $40 million in venture funding • Treated its cleaners as independent contractors, and not employees • CEO said the “deciding factor” in failure to raise money and failure was worker classification lawsuits (Recode July 17, 2015)
  • 6. ericanbar.org | www.abacle.org Employment Status: The Law • The presumption is that the worker is an Employee (Cal. Lab. Code §3357) • Different agencies/jurisdictions have different tests • IRS • DOL/FLSA • CA Common Law and EDD • Statutory Employees
  • 7. ericanbar.org | www.abacle.org Employment Status: The Law • IRS: The Control Test • Behavioral Control • Financial Control • Type of Relationship • DOL/FLSA: Economic Realities Test/Silk Factors • Focus is on the degree of control the Company has over the worker performing the service. The key inquiry is the right to control not whether the Company actually exercises the control. • In July 2015, DOL issued administrative guidance and explained that the test focuses on whether the worker is economically dependent on the hiring entity or is in business for herself/himself. • CA Common Law/EDD: S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341 • This is a multi-factored test with the most significant factor considered is whether the principal has control or the right to control the worker as to the work done and the manner and means in which it is performed. • Statutory Employees
  • 8. ericanbar.org | www.abacle.org Dynamex Decision • Dynamex Operations West, Inc. v. Superior Court of Los Angeles adopts a three-factor ABC test, which presumes a worker is an employee unless all of the following tests are satisfied • Worker is free from control and direction of hiring authority • Worker performs work outside the usual course of the hiring entity’s business, AND • Worker is engaged in an independently established trade,
  • 9. ericanbar.org | www.abacle.org Dynamex and Tax? • Decision applies “for purposes of California wage orders” (emphasis in original), not for tax classifications • Worker may be classified differently for different purposes • Will the EDD use Dynamex and become more aggressive? • EDD has not stated that it will apply Dynamex
  • 10. ericanbar.org | www.abacle.org AB-5 • California Assembly Bill 5 would codify Dynamex in the Labor Code and the Unemployment Insurance Code “For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission…” • Numerous carve-outs proposed
  • 11. ericanbar.org | www.abacle.org AB-5 • Uber, Lyft and DoorDash threatened to spend $90 million on a 2020 ballot measure unless the Legislature passes a new bill allowing them to avoid classifying drivers as employees • California Labor Federation, representing 1,200 unions with 2.1 million members, vowed to defeat the effort (LA Times August 30, 2019)
  • 12. ericanbar.org | www.abacle.org 2. Managing Risk: What Are the Direct & Indirect Costs?
  • 13. ericanbar.org | www.abacle.org Direct Costs of Misclassification Finding • Unpaid back federal, state and local income tax withholdings • Unpaid back Social Security and Medicare contributions • Unpaid federal and state unemployment insurance taxes • Unpaid workers’ compensation premiums • Unpaid back overtime compensation and/or minimum wages • Overtime and Minimum Wage Penalties • Unpaid work-related expenses • Unpaid sick and vacation pay • Waiting Time Penalties (Cal. Lab. Code §203) • Cal. Lab. Code §226.3 (Failure to Provide Accurate Wage Statements) • $250 per employee per violation in an initial citation; $1,000 per employee for each subsequent violation • SB 459 (Cal. Lab. Code §226.8 & §2753) • Willful misclassification – Penalties range from $5,000 - $15,000 PER violation. If an entity is in engaged in a “pattern or practice” of misclassification fines increase to $10,000 - $25,000 per violation • Joint and Several Liability with Employer for knowingly advising misclassification (exception for practicing attorneys and persons advising his/her employer)
  • 14. ericanbar.org | www.abacle.org Direct Costs of Misclassification Finding • Attorney Fee Shifting Statutes • Minimum Wage/Overtime (Cal. Lab. Code §1194) • Nonpayment of Wages/Benefits (Cal. Lab. Code §218.5) • Enforcement of Public Interest (Cal. Civ. Proc. Code §1021.5) • Cal. FEHA Fees (Cal. Gov’t. Code §12965(b) • Criminal Penalties • Failure to procure workers’ compensation insurance (Cal. Lab. Code §3700.5) • Knowingly and Intentionally Violating Cal. Lab. Code §226 (Failure to provide wage statements) • Potential Insurance Premium Fraud • Intentionally underreporting payroll or misclassifying workers to avoid workers’ compensation premiums • Example: • T.B. Concrete – charged with 15 felony counts of submitting false payroll reports and misclassifying employees to avoid payroll taxes and workers’ compensation expenses. State claimed that 111 (85% of the Company’s payroll) were underreported. • Stop Orders and Penalty Assessments under Cal. Lab. Code §3710.1 • PAGA Claims • Allows plaintiffs’ attorneys to bring suit on behalf of individuals as a stand-in for the attorney general in order to seek any civil
  • 15. ericanbar.org | www.abacle.org Indirect Costs of Misclassification Finding Short-Term Costs & Benefits • Employers save around 30% on payroll and related taxes by utilizing Independent Contractors • Do not need to provide: • Health Benefits • Retirement Benefits • Paid Time Off • Employees have: • Flexible Work Schedules • Supplemental Income • No Benefits • PTO, Health or Retirement • No Legal Protection • No workers’ compensation or wage and hour law protection • No Job Security
  • 16. ericanbar.org | www.abacle.org Indirect Costs of Misclassification Finding Long-Term Costs & Benefits • How is this new labor market impacting Company culture? • Potential Impact on Hiring – Who will join your Company? • Limited to No Training of Workers Classified as Independent Contractors •  Affects Quality Control • Employee Loyalty • Independent Contractors will work for competitors • Risk of Trade Secret Theft • Impact on Investor Funding • Red flag in due diligence, concern with litigation risk Vs. • Focused on financial benefits; want startups to keep costs low
  • 17. ericanbar.org | www.abacle.org Indirect Costs of Misclassification Finding Litigation Costs • Statute of Limitations • Varies upon jurisdiction, generally 2-3 years • No Waiver of Wage and Hour Law Claims in a Release • Many Releases include language directly asserting that wage and hour law claims are not waived • Can include language preventing collection of monetary relief from wage and hour claims • Attorney’s Fees • Fee Shifting Statutes make litigating potentially extremely expensive • Liquidated Damages
  • 18. ericanbar.org | www.abacle.org 3. Strategies for Avoiding Misclassification
  • 19. ericanbar.org | www.abacle.org Strategies for Avoiding Misclassification If the Company desires to utilize independent contractors: • Re-evaluate current independent contractors to ensure status is still applicable. • Remember status can change over time • Draft an independent contractor agreement that establishes real independence • Structure the day-to-day work relationships to follow the independent contractor agreement and be sure that the daily activities reflect actual independence • If status of a worker or group of workers looks like a “close call” or falls into the “legal grey area,” consider classifying as an employee (part-time, temporary, etc.) • Consider using a Staffing Agency or Workforce management firm • CAUTION – recent case law has held joint and several liability for Company with staffing agency/workforce management firm for indirect
  • 20. ericanbar.org | www.abacle.org Hybrid Worker Classification “Dependent Contractor” • Receives some but not all employee protections • Canada • Employers are required to provide the worker with reasonable notice upon termination - Keenan (c.o.b. Keenan Cabinetry) v. Canac Kitchens, a Division of Kohler Ltd (“Canac”) • Ultimate factors are: exclusivity and economic dependence • 80% or more of income from a single source • Germany • Worker that is economically dependent on his or her job and has been working with one entity for several years • 50% of income from a single source • “Minijobs” are permitted for part-time workers where the worker earns no more than €450 per month and the income is tax-free
  • 21. ericanbar.org | www.abacle.org Reporting • IRC 6041A(a): 1099-Misc reporting of payments of $600 or more in a trade or business • 6050W: 1099-K for payment settlement agencies • Applies if a Payment Settlement Agency (PSE) makes a payment in settlement of a reportable payment transaction • PSE includes a third party settlement organization (TPSO) • A TPSO is a PSE in the case of a third party network • A TPSO is the central organization that has the obligation to pay
  • 22. ericanbar.org | www.abacle.org 1099-K Reporting • in settlement of third-party payment network transactions above the minimum reporting thresholds of • gross payments that exceed $20,000 AND • more than 200 such transactions • Caution: • The IRS has issued several private letter rulings stating that online platforms and marketplaces have a reporting requirement under 6050W.
  • 23. ericanbar.org | www.abacle.org 1099-K Examples • Service-recipient A, in the course of business, pays $600 of fixed or determinable income to B, a repairman, through a third party payment network. B is one of a substantial number of persons who have established accounts with Y, a third party settlement organization that provides standards and mechanisms for settling the transactions and guarantees payments to those persons for goods or services purchased through the network. Y is responsible for making the payment to B. Under paragraph (d)(4)(i) of this section, A is not required to file an information return under section 6041A(a) with respect to the transaction because the transaction is a third party network transaction that is subject to reporting under section 6050W. • 1.6041A-1(d)(4)(ii), Ex. 2.
  • 24. ericanbar.org | www.abacle.org 1099-K Examples • Restaurant owner A, in the course of business, pays $600 of fixed or determinable income to B, a repairman, through a third party payment network. B is one of a substantial number of persons who have established accounts with Y, a third party settlement organization that provides standards and mechanisms for settling the transactions and guarantees payments to those persons for goods or services purchased through the network. Y is responsible for making the payment to B. Under paragraph (a)(1)(iv) of this section, A, as payor, is not required to file an information return under section 6041 with respect to the transaction because the transaction is a third party network transaction that is subject to reporting under section 6050W. • 1.6041-1(a)(1)(v), Ex. 2.
  • 25. ericanbar.org | www.abacle.org Sales Tax Nexus • South Dakota v. Wayfair, Inc. allows states to tax remote sales • Under prior law states could only tax sales by businesses with a physical presence in the state • Under Wayfair economic activity in a state — economic nexus — can trigger a sales tax collection obligation, including sales revenue, transaction volume or both
  • 26. ericanbar.org | www.abacle.org Economic Nexus • Most states now have an economic nexus law or rule on the books • States also tax remote sales based on affiliate nexus and click-through nexus • Affiliate nexus is based on certain relationships between the remote seller and affiliated entities such as parent-subsidiary • Click through nexus is based on an in-state person referring sales to the out-of-state seller usually through a website link
  • 27. ericanbar.org | www.abacle.org Marketplace Facilitators • Some states require marketplace facilitators to collect and remit tax on behalf of third-party sellers • Marketplace that contracts with third party sellers to promote their sale of goods and services through the marketplace. Amazon is a marketplace facilitator.
  • 28. ericanbar.org | www.abacle.org California • An out-of-state retailer must register and collect and remit California sales and use tax if, in the preceding or current calendar year, the retailer “and all persons related to the retailer” have more than $500,000 in total combined sales of tangible personal property for delivery in California. • As of October 1, 2019, in-state marketplace facilitators and out-of-state facilitators that meet the $500,000 threshold must collect the tax due on all sales made in the state through the marketplace ( and not the marketplace sellers)
  • 29. ericanbar.org | www.abacle.org For more information, contact us. Royse Law Firm, PC www.rroyselaw.com Silicon Valley 149 Commonwealth Drive Suite 1001 Menlo Park, CA 94025 P: 650-813-9700 San Francisco 135 Main Street 12th Floor San Francisco, CA 94105 P: 415-421-9700 Santa Monica 520 Broadway Suite 200 Santa Monica, CA 90401 P: 424-238-3335 Orange County 135 S. State College Boulevard Suite 200 Brea, CA 92821 P: 310-481-0125
  • 30. ericanbar.org | www.abacle.org Questions? All attendees can submit questions via the Q&A feature on the webinar interface.