CDTFA Pursuing Online Sellers of Electronic Cigarettes - Understand Your Obligations

California Governor Newsom and the California Department of Tax and Fee Administration (“CDTFA”) have recently indicated that they will begin stepping up their enforcement of the e-cigarette industry. It appears that CDTFA has started these efforts by enforcing obligations of remote sellers of electronic cigarettes.
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California imposes strict rules on “delivery sellers” of tobacco products regardless of whether they are located in California or another state. Essentially, all remote sales of tobacco products other than cigars are subject to these requirements. Noncompliance with these rules can subject remote sellers to substantial enforcement and penalties. While these rules existed for years, cigars have historically been exempt from such delivery seller requirements and smokeless tobacco products are already subject to similar restrictions at the federal level pursuant to the Prevent All Cigarette Trafficking (PACT) Act. It was only recently when the licensing provisions were amended in 2016 to capture electronic cigarettes that these products became subject to delivery seller requirements.

Among the requirements applicable to delivery sellers which you may not be aware of:

• Licensing Requirements​ - The California Revenue and Tax Code states that a delivery seller making a sale into California is required to maintain “​any applicable licenses...as if the delivery sale occurred entirely within this state.​” RTC § 30101.7. Delivery sellers are therefore required to become licensed and comply with all obligations associated with such a license.
• Excise Tax Collection Obligations for Remote Sellers ​- The CDTFA recently began notifying online retailers that the delivery seller rules of RTC § 30101.7 obligates remote sellers, in addition to obtaining a license as a distributor, to register for a Tobacco Tax Account and collect and remit the tax in the same manner as licensees engaged in business in the state. CDTFA has been working to identify online sellers not registered with the State and notify them of their obligations. ​Making matters worse, remote sellers could be on the hook for prior periods.​
• Different Excise Tax Calculation for Businesses Shipping from Outside California ​- Complicating factors for remote sellers, CDTFA released ​Special Notice L-698​ (August 2019) that would require out-of-state sellers to collect tax based on their selling price to consumers rather than on their purchase price, a substantially higher tax base.
• Use Tax Collection Obligations ​- Remote sellers located outside of California may be required to collect and remit California use tax if it meets certain minimum sales requirements. California adopted economic nexus rules following the U.S. Supreme Court decision in ​Wayfair​ pursuant to which remote sellers are required to collect use tax if during the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California exceeded $500,000.​

California’s high tax rate and CDTFA’s aggressive tax posture expose remote sellers to substantial liability. Don’t be caught off guard. Contact us today to discuss your options and minimize your risk.