California Requires Remittance of Collected Sales Tax Not Paid to Other States

January 31, 2023

At a glance

The main takeaway: A California-based seller mistakenly collected sales tax for a state in which it was not registered, and thus was required to remit those sales taxes to California.
Assess the impact: It’s important to understand where your business has sales tax nexus and that your systems properly collect the correct amount of sales tax only in the jurisdiction where your business is required to do so.
Take the next step: Aprio’s State and Local Tax (SALT) team can assist your business in resolving any tax collection errors and provide guidance to ensure your business remains in compliance with its sales tax obligations.

Schedule a free consultation today to learn more!

The full story:

A crucial component of sales and use tax compliance is making sure that the correct amount of tax is collected, reported and remitted to the proper jurisdiction. When a company’s sales tax process, including any software used for this purpose, is not set up properly, a company may find itself with sales tax collected in a jurisdiction for which it is not registered or required to collect sales tax. Often, the company is left wondering what it’s supposed to do with that money. Recently, the California Office of Tax Appeals issued an opinion explaining that the taxes must either be returned to the customer or remitted to the state of California as excess tax collected.^[1]

A closer look at the case

Body Wise International, LLC (taxpayer), is a California-based retailer of weight loss and nutritional products and was registered to collect sales tax in approximately 35 states, including California. The taxpayer received orders through its website and California call center as well as from independent selling agents based in taxing jurisdictions outside California. The taxpayer shipped its products from a warehouse in California directly to the end-user via common carrier.

The taxpayer’s sales tax software was programmed mistakenly to charge sales tax on sales to all states, including those states where the taxpayer was not registered to collect sales tax. Invoices issued by the taxpayer stated the ship from location as the California warehouse and a ship to location of the customer’s delivery address. The tax was noted on a separate line labeled only as “Tax Amount.” During the audit, California claimed that sales tax collected on sales shipped to states where the taxpayer isn’t registered (and thus, where sales tax was not remitted) should be remitted to California (these sales covered a period from 2005-2013).

In California, sales tax collection is treated as a “reimbursement” by the customer since the tax is imposed on the seller.^[2] The seller is entitled, but is not required, to “reimburse” itself for that sales tax liability by collecting it from the customer and indicating as such on the proof of sale.^[3] When a seller collects sales tax in excess of the amount required to be remitted, California refers to that excess amount as “excess sales tax reimbursement” which the state requires to be refunded to the buyer (upon being notified by the state to do so). Any amounts not able to be returned to customers must be remitted to the state.^[4]

As explained in the opinion, a presumption that a seller collected “sales tax reimbursement” exists if the seller:

Sells tangible personal property,
At retail to a purchaser and
Charges an amount for sales tax reimbursement on a document of sale.

The document of sale is not required to use the exact phrase “California sales tax reimbursement” to trigger the assumption. Thus, the taxpayer’s use of the phrase “Tax Amount” on its invoice was enough to create the presumption.

The ruling explained

To rebut the presumption, the taxpayer argued that when the customer’s address was outside California, the phrase “Tax Amount” represented the collection of sales tax for the customer’s state. This argument was rejected, however, since the taxpayer was not registered in these states, did not remit any tax to these states and had not made any effort to resolve this overcollection from a systems programming error since the time it had been collected. Ultimately, the opinion concluded that “Tax Amounts” collected from customers, not remitted to other states and not returned to customers, were “excess sales tax reimbursements” and are required to be remitted to the state.

This ruling illustrates two important concepts:

First, not only is it important to analyze where your business has sales tax nexus and is required to collect sales tax, but it is equally important to set up your systems to properly collect the correct amount of sales tax only in those jurisdictions where required to do so.
Second, if your business does somehow collect sales tax in excess of the amount required, it is crucial to take immediate action as soon as that error is discovered; your business should never hold on to sales tax dollars collected from customers.

The bottom line

Aprio’s SALT team works with our clients to provide guidance on these types of sales tax processes and procedures as well as assisting in resolving any errors for over- (or under-) collection of tax. Our assistance ensures that your business is in compliance with its sales tax obligations and does not incur unexpected tax liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

^[1] Matter of Body Wise International, LLC (OTA Case No. 19125567; 2022 – OTA – 340P), August 11, 2022.
^2] Cal. Rev. & Tax Code § 6051.
^[3] Cal. Civ. Code § 1656.1.
^[4] Cal. Rev. & Tax Code § 6905.1; see also Cal. Code Regs § 1700.