What Online Retail Clients Can Expect in the Near Future
One of the most significant development that we’ve seen in sales and use tax over the last several years is the evolution of how states are targeting online sellers.
Nerves are understandable, because there’s a lot at stake. A recent report by the U.S. Government Accountability Office (GAO) found that state and local governments could see an additional $8 billion to $13 billion in tax revenue if states could require all remote sellers to collect sales tax. In other words, online sellers can expect to collect a lot more in state and local taxes in the future.
The important point is sellers would be required to COLLECT the tax. But if they don’t handle their requirements correctly, then this could come out of their profits; $8 to $13 billion - that’s serious money!
When state governments see a potential revenue stream of that magnitude, they will investigate options to capture it as quickly as possible. In 2018, they have several options at their disposal.
The states have taken different approaches to redefine the traditional physical presence nexus definition starting in 2008 in New York with Click-Through nexus. Almost half the states with a sales tax have followed their lead.
Illinois and Arkansas changes the landscape in 2011 through modifications to another physical nexus standard by including affiliated companies as a nexus creating activity in their state. And again, more than half of the sales tax states followed suit – and broadened what constitutes “affiliate nexus” beyond related entities.
In 2016, Arizona came up with Marketplace nexus which impacted the party that has the collection responsibility. Just a few have followed – but in Washington, the major marketplace providers have agreed to start collecting.
Colorado took a different approach back in 2010. They didn’t require remote sellers to collect tax but rather to provide customer information, so the state could collect the use tax from the customers. After a lengthy litigation, this rule became effective in 2017 and almost a dozen states have enacted similar legislation. All of these have been tested and found to be constitutional.
But Alabama took the bold step in 2016 enacting Economic nexus. However, it isn’t an Alabama case that will test the approach. Instead, South Dakota with their legislation that was effective just a few months later is headed to the U.S. Supreme Court.
There are a baker’s dozen other states that have passed similar legislation. None are being enforced either due to legal challenges or provisions in the law that delays the effective date until either federal legislation or a Supreme Court decision.
The most commonly enacted types of sales and use tax legislation over the last two years are economic nexus, marketplace nexus, and reporting requirements. This is directly related to the Colorado reporting challenge results, the acceptance of the South Dakota v Wayfair economic nexus case and the agreement by marketplace providers to collect tax on behalf of their sellers in Washington. Based on all this, it seems unlikely that this trend will abate anytime soon.
These three types of legislation are particularly important for online sellers to be aware of since they specifically target out-of-state sellers that make sales into a state. If a state enacts one of these types of legislation, your retail clients may need to collect and remit sales tax in that state or administer onerous notice and reporting requirements.
Predictions for the Near Future
Bearing all of the aforementioned in mind, take a look at our top three predictions for what’s in store for online sellers in the near future:
1. States Will Continue to Pursue Sellers Through Online Marketplace Providers
Based on Washington’s success, state departments of revenue are pressuring online marketplace providers to provide them with information on marketplace sellers who have inventory in the state or collect the tax.
Enacting legislation to compel online sellers to register to collect and remit sales tax on their sales into the state is one thing. Going directly to the source – such as Amazon – to secure lists of online sellers is entirely another.
Massachusetts is one state using this hardball tactic. Last year, Massachusetts ordered Amazon to provide the state’s Department of Revenue with a list of third party sellers who have inventory in Massachusetts warehouses. Eventually, Amazon complied and agreed to turn over the information to the Massachusetts Department of Revenue at the end of January.
How Massachusetts will choose to use this information remains to be seen. However, Massachusetts is not the only state to use this approach.
Rhode Island will also be receiving lists of third party sellers from Amazon under its reporting and notice requirements. Connecticut exerted pressure on some large remote sellers to turn over customer data. They are now sending out use tax notices to its residents looking for the tax due on their out of state purchases.
South Carolina took a more aggressive approach and assessed tax against Amazon for the collection of tax on all third-party sales. Instead of pursuing third party sellers in this case, South Carolina is attempting to hold Amazon responsible for the collection of tax on all sales executed on its portal – including third party sales.
The initial assessment for just one quarter in 2016 was $12 million. Although the case is still pending, the South Carolina Court denied the Department of Revenue’s request for an injunction to force Amazon to collect the tax pending the outcome of the case. The case isn’t scheduled to be heard until November 2018, so we will have to wait a while for a decision on this.
We also know that California and Washington have contacted Fulfillment by Amazon (FBA) sellers with nexus assertions. And unfortunately, once you are “caught” by a state, there is little that can be done.
Over the coming year, we fully expect this trend to continue across the country, especially as states successfully secure seller information.
2. Marketplace Nexus and Reporting Requirements Legislation Will Be Introduced in More States
As previously mentioned, states have increasingly introduced and enacted marketplace nexus and use tax notice and reporting requirements legislation over the past several years. Online sellers should expect this trend to continue in 2018 – specifically the introduction and enactment of marketplace legislation similar to what Washington enacted in 2017.
Per the Washington legislation, effective January 1, 2018, remote sellers, referrers, and marketplace facilitators must either collect and remit Washington sales or use tax on taxable sales into Washington or comply with notice and reporting requirements.
The requirements apply to remote sellers or marketplace facilitators with gross receipts from retail sales sourced to Washington in the current or preceding calendar year of at least $10,000. We will likely see more of this type of legislation surface soon, particularly since Amazon, Etsy, and Walmart have now agreed to collect Washington tax on behalf of all third-party sellers into the state.
New York’s governor included this in his budget address so look for legislation any day to be filed. Additionally, expect to see more states introducing and enacting use tax notice and reporting requirements legislation over the coming months.
This legislation doesn’t require the seller to collect the tax. Rather, the seller is required to notify customers of their use tax liability. To ensure tax will be collected, the seller must notify the state of all their customers in the state.
States may follow Pennsylvania’s lead which requires marketplace sellers to provide the state with the list of all third party sellers on its platform. Nebraska has introduced this type of legislation. Notice and reporting requirements are often more burdensome than simply collecting the tax – which is what the states are hoping for, that sellers will elect to collect tax in lieu of complying with the notice requirements.
It appears the days are numbered until remote sellers have some sort of tax collection or reporting requirements obligation in every state. The big question is: Will the U.S. Supreme Court be the deciding factor? Which leads us to the next prediction…
3. South Dakota v. Wayfair – Who Knows What Will Happen?
On January 12, 2018, the U.S. Supreme Court agreed to hear South Dakota v. Wayfair, Inc., a deeply significant court case regarding sales tax obligations for remote sellers.
Here is a brief summary of what happened:
- In March 2016, South Dakota enacted economic nexus legislation, effective May 1, 2016, that added sales and use tax collection requirements for remote sellers who meet certain sales thresholds and make sales into South Dakota. Sellers who make taxable sales exceeding $100,000 annually OR who make more than 200 separate transactions in the state are deemed to have created nexus.
- One year later, in March 2017, the South Dakota Sixth Judicial Court ruled that the legislation is unconstitutional. After an expedited state hearing process, the South Dakota Supreme Court affirmed the decision on September 13, 2017. This led to an appeal to the U.S. Supreme Court and submission of numerous Amicus Briefs. The U.S. Supreme Court agreed to hear the case on January 12, 2018. It is expected that oral arguments will occur in April with a decision by June 2018.
A Whirlwind of Activity
The issue at hand is whether South Dakota’s economic nexus legislation violates the Commerce Clause of the U.S. Constitution and the precedent set by the Supreme Court in Quill Corp. v. North Dakota back in 1992.
The Quill ruling didn’t account for the current landscape of internet sellers, and many believe that this is a long overdue reconsideration of that decision. The Supreme Court’s decision on this case could have a seismic impact on sales and use tax in the United States.
There are many options for the Court and until they rule, it is expected that states will continue to pass remote seller legislation to be able to enforce collection of some sort. Those of you that were in the state tax field when the Quill decision was pending might remember states also enacted a lot of legislation in anticipation of a decision in favor of North Dakota.
To stay up to date on the latest developments regarding sales tax for online sellers, make sure to bookmark the Sales Tax Institute’s Remote Seller Nexus Chart and check back regularly.
Diane Yetter, CPA, MST is president and founder of YETTER, a sales tax consulting and tax technology firm in business since 1996. She is also founder of The Sales Tax Institute, a premier think tank that offers live and online courses to educate business professionals about...