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:
About Diane Yetter
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 sales and use tax.