Editor’s Note: This guest blog post comes courtesy of Gail Cole with Avalara.
Like many years, 2018 is shaping up to be a big year for sales tax changes. In addition to run-of-the-mill activities like expanding sales tax to new goods and services and exempting or reducing rates on others, states are pushing ahead with attempts to increase remote sales tax collections. In fact, 2018 may go down in history as the year states broke through the physical presence barrier.
Moving Beyond Physical Presence
The year began with big news: The Supreme Court of the United States announced it would consider South Dakota v. Wayfair, Inc., a case that could change states’ ability to tax sales by out-of-state sellers.
Precedent holds that a business must have a substantial connection (nexus) to a state for the state to impose a sales tax collection obligation. In 1992, the Supreme Court held that this connection must be physical in nature. Since that time (and indeed even prior to it), many states have been working to push beyond the physical presence limitation.
The 1992 case, Quill Corp. v. North Dakota, centered on a mail order company. Shortly after it was decided, the internet dramatically changed the way the world does business. If it was once relatively easy for sellers to market and sell to customers in distant states, it’s now even more so. Exponentially.
So, states have amplified their efforts to capture remote sales tax revenue. They’ve adopted affiliate nexus, whereby a business establishes nexus through its ties to in-state affiliates; click-through nexus, whereby generating business through referrals (links) on in-state websites triggers nexus; and economic nexus, as in South Dakota, whereby economic activity alone (e.g., $100,000 or 200 separate sales transactions) creates nexus.
Many of these laws have been challenged, which has allowed states, in turn, to try to challenge the physical presence limitation. To date, South Dakota has been most successful — though the battle is not won.
Oral arguments in South Dakota v. Wayfair, Inc. were presented on April 17, and the court’s expected to announce a decision by the end of June. If it sides with South Dakota, more states will likely adopt an economic nexus provision like South Dakota’s S.B. 106, which triggered the Supreme Court case.
If the court sides with Wayfair, states will continue to seek creative ways to tax remote sales. Many will likely focus on marketplace sales, internet vendors that place software on in-state devices, and/or use tax notification and reporting for non-collecting sellers.
Taxing the Marketplace
After Amazon began collecting and remitting tax in all states that have one, in the spring of 2017, it dawned on states that their tax laws had a loophole. Yes, Amazon was taxing sales, but only sales of its own products. It wasn’t taxing sales made by third-party sellers on its marketplace. In most states, it still doesn’t.
In June 2017, Minnesota became the first state to put a tax on marketplace sales, though it won’t take effect until July 1, 2019. Rhode Island, Washington, and Pennsylvania quickly followed suit, with Washington requiring marketplace facilitators (e.g., Amazon) to collect as of January 1, 2018, and Pennsylvania requiring it as of April 1, 2018. Rhode Island’s law took effect August 17, 2017.
Already in 2018, Alabama, Kentucky, and Oklahoma have enacted marketplace sales tax laws. Similar measures have been proposed or are under consideration in other states, including Hawaii and Iowa. And although Connecticut, Massachusetts, and South Carolina haven’t created new laws to tax these transactions, they’re nonetheless going after marketplace sales tax revenue.
Taxing (Web) Cookies
Last year, Massachusetts pointed out that internet vendors differ from other vendors because of the software (apps) and web cookies they place on their customers’ devices. These, the state says, give them a physical presence that other remote vendors don’t have.
It’s an interesting stance, one emulated by Ohio. Connecticut Department of Revenue Services Commissioner Kevin Sullivan also thinks “Massachusetts is on to something.” The department was to provide information about basing tax collection on in-state computer software in early 2018, but there’s no news as yet.
Making it More Painful to Not Collect
States aren’t only creating new tax collection obligations. They’re also encouraging voluntary compliance by imposing onerous use tax notice and reporting requirements on non-collecting sellers. Generally, these require non-collecting sellers to:
- Inform purchasers at the time of transaction that they don’t collect sales tax and that use tax may be due directly to the state
- Give an annual purchase report to customers
- Give an annual customer purchaser report to the state
Colorado paved this path for states: It spent seven years defending its 2010 use tax reporting law. In the end, the Supreme Court of the United States let it stand, and it took effect July 1, 2017.
Several other states have emulated or adopted a variation of Colorado’s law, including Alabama, Georgia, Louisiana, Pennsylvania, Vermont, and Washington. Once again, Connecticut is taking a hard line with non-collecting sellers, although the legislature hasn’t enacted a non-collecting seller use tax reporting law. The Department of Revenue Services has told non-collecting sellers they must either collect and remit, or turn over three years’ worth of sales records.
Should the Supreme Court side with Wayfair in South Dakota v. Wayfair, Inc., more states will likely consider use tax notification and reporting for non-collecting sellers.
The Rest of the Iceberg
States’ efforts to push beyond physical presence make headlines, but they’re far from the only changes occurring with state sales tax.
An elaborate dance is always under way at the state, and sometimes even local, level: As some goods and services are exempted, others are newly taxed.
Changes announced so far this year include:
- Alabama announced it would offer a tax amnesty program.
- Florida approved two sales tax holidays.
- Indiana decided to exempt software as a service
- Kentucky decided to tax a number of additional services.
- The new governor of New Jersey is trying to increase the state sales tax rate (which dropped in at the start of 2017 and again at the beginning of this year). He would also tax sales of electronic cigarettes, and he would legalize and tax recreational marijuana.
- Wisconsin adopted a sales tax holiday for clothing and school supplies, sales tax relief for veterans organizations, and a sales tax rebate for dependent children.
Want to learn more about 2018 sales tax changes? Join our “2018 Sales Tax Changes You Need to Know About” Webinar.
Avalara helps businesses of all sizes achieve compliance with transactional taxes, including sales and use, VAT, excise, communications, and other tax types. The company delivers comprehensive, automated, cloud-based solutions that are designed to be fast, accurate, and easy to use.