California Governor Vetoes Sales Tax Bill Seeking to Require Large Online Retailers to File Informational Reports Detailing Sales by Destination

This week, Governor Newsom vetoed Senate Bill 792 (Glazer), which would have required large online retailers to include with their sales tax returns an additional schedule that reports gross receipts based on the “ship to” or destination location.  The bill targeted online retailers with over $50 million in annual sales of tangible personal property.  Qualifying online retailers that failed to report this information would have been subject to a penalty of $5,000.

California imposes a statewide sales tax on retailers for the privilege of selling tangible personal property at retail within the state, measured by the gross receipts from each sale.  An additional sales tax of 1.25% (the Bradley-Burns Tax) is imposed on sales subject to the statewide sales tax, of which 1% is allocated to localities to use at their discretion and the remainder is distributed to county local transportation funds to support transportation programs.

Under California’s unique local sales tax regime, sales are sourced based on the transaction location instead of the customer’s address.  The locality constituting the “place of sale” is generally the retailer’s place of business in California that participated in the sale (or if the retailer has multiple places of business in California that participated in the sale, the place where principal negotiations for the sale were carried on).  If an out-of-state retailer does not have a permanent place of business in California, the “place of sale” is the locality from which delivery or shipment is made (e.g., a warehouse, fulfilment or distribution center, etc.).  In other words, for purposes of allocating Bradley-Burns Tax revenue, California utilizes an “origin-based” approach rather than a “destination-based” approach.

The proponents of Senate Bill 792 had hoped this new “destination-based” informational reporting requirement would show that Bradley-Burns Tax revenue is being unfairly allocated to local jurisdictions that host fulfilment or distribution centers, rather than the localities where the customers are located. Although Governor Newsom ultimately vetoed the bill, the fact the bill received strong support (passing by more than a two-thirds vote in both the state Senate and Assembly) shows the California Legislature does not think kindly of California’s local sales tax allocation rules, or local tax-related economic development agreements between localities and retailers with fulfilment or distribution centers located in their jurisdiction.

In vetoing the bill, Governor Newson explained in a letter to the state Senate that the bill duplicates extensive sales and use tax information that is already accessible on the California Department of Tax and Fee Administration’s online portal, and that Assembly Bill 485 – which Governor Newsom signed in 2019 – already adequately provides increased transparency and oversight of the use of local tax-related economic development agreements. Acknowledging the Legislature attempted to impose a “destination-based” informational reporting requirement on an “origin-based” local tax allocation regime, Governor Newsom ended his veto explanation letter by stating the “bill creates a burdensome and costly new reporting requirement for many retailers that is unrelated to their tax obligations.”

Nevertheless, this may not be the end of the road for Senate Bill 791.  Due to the bill’s strong support in both the state Senate and Assembly, California’s Legislature may still choose to override Governor Newsom’s veto (although there has been no veto override in the California Legislature since 1979).