Under a new California law signed by Governor Gavin Newsom on Thursday, out-of-state online retailers that make more than $500,000 from California sales must collect sales tax from their California customers.

Although the largest online retailers already collect California sales tax, smaller retailers that sell through the sites have not paid state taxes until recently.  The new law clarifies that online sales platforms must collect tax for products sold on their websites even if they come from so-called third-party retailers, but provides an exemption for out-of-state retailers that make less than $500,000 from California sales.

As we previously reported, the U.S. Supreme Court held in South Dakota v. Wayfair that states can tax purchases from out-of-state sellers.  After that ruling, numerous states, including California, took steps to begin collecting sales tax from out-of-state retailers.

On April 1, California started requiring out-of-state retailers to register with the state and begin charging customers sales tax.  That policy applied to retailers making more than 200 transactions or $100,000 in California sales. Worried that would harm small businesses, state lawmakers fast-tracked a bill to raise the cap to $500,000, and Governor Newsom signed it into law Thursday.

The new law, AB147, also codifies California’s new policies for larger online retailers, which state lawmakers argued had an unfair advantage over in-state businesses who already had to tax California customers.

“This new law will close this major loophole by mandating that all online retailers collect and remit all the state and local sales taxes due and level the playing field between our brick and mortar businesses in our state,” California Treasurer Fiona Ma said in a written statement.

The new law takes effect immediately.

For questions or more information, contact the author, Charles Lin, or any member of our Retail Law team.