Background of the Ruling
The California Office of Tax Appeals has ruled that a weight loss and nutritional products retailer must remit tax collected from out-of-state customers on California exempt or non-taxable transactions.
The retailer accepts customer orders through its California call center and website and ships the property to end-use consumers from a California warehouse.
The retailer’s tax software was mistakenly programmed to charge a “tax amount” on all sales, including sales to customers located in states where the retailer was not registered to charge or collect a sales or use tax.
Legal Framework in California
In California:
- A retailer that sells tangible personal property and charges the purchaser an amount for sales tax reimbursement on a document of sale is presumed to have collected an excess tax reimbursement.
- When an amount constituting a reimbursement for taxes is computed upon an amount that is not taxable or is in excess of the taxable amount and is actually paid by the customer, the amount paid must be either:
- Refunded to the customer, or
- Remitted to the California Department of Tax and Fee Administration (CDTFA).
Reason for the Decision
Here, the retailer is liable for the erroneous collection of sales tax reimbursement in jurisdictions where the retailer is not registered or authorized to collect sales or use tax.
Additionally:
- The retailer completed its performance with respect to delivery of the property in California upon delivery to a common carrier.
- The retailer holds a California seller’s permit.
- The retailer did not refund its customers.
Therefore, the evidence shows that the tax amount collected is an excess sales tax reimbursement that must be remitted to the CDTFA.
Reference:
In the Matter of the Appeal of Body Wise International, LLC,
Cal. Office of Tax Appeals, 2022-OTA-340P, 08/11/2022 (Precedential) (released November 2022)
Frequently Asked Questions
Why did the California Office of Tax Appeals require the retailer to remit the tax?
The retailer collected a “tax amount” from out-of-state customers on non-taxable transactions, even though it was not authorized to do so. California law requires such excess tax reimbursements to be either refunded or remitted to the state.
What is an excess sales tax reimbursement?
An excess sales tax reimbursement occurs when a retailer collects sales tax on a non-taxable or out-of-state transaction. If the amount is not refunded to the customer, it must be sent to the California Department of Tax and Fee Administration (CDTFA).
Was the retailer registered to collect tax in the other states?
No, the retailer was not registered to collect or remit sales or use tax in the states where the out-of-state customers resided. Despite this, its tax software still charged them tax.
Why didn’t the retailer refund the tax to its customers?
The article states that the retailer did not provide refunds to customers for the mistakenly collected tax. Because of this failure, it was obligated under California law to remit the amounts to the CDTFA.
Does holding a California seller’s permit affect the ruling?
Yes. Since the retailer holds a California seller’s permit and completed delivery from a California warehouse, the state has jurisdiction over the transaction and tax handling, reinforcing the requirement to remit the excess reimbursement.