State and local taxing jurisdictions continue to make sales and use tax reporting increasingly complex for out-of-state retailers. The most recent trends in this area involve:
(1) Nexus standards (i.e., when a state can require a business to collect and remit sales tax from in state residents);
(2) Requiring out-of-state businesses to notify purchasers that they may owe use tax on their purchases; and
(3) Requiring out-of-state sellers to report certain in-state sales information to the state’s department of revenue. Nexus
Since 1992, when the U.S. Supreme Court ruled in Quill Corporation v. North Dakota
(504 U.S. 298), a business needed more than a “de minimis
” physical presence in a state (i.e., in-state property, employees, contractors, sales reps) before such state could require the company to collect and remit sales tax (i.e., nexus). Unfortunately, in deciding Quill
, the Court did not define what constitutes a “more than de minimis” amount. Not surprisingly, most states have taken an aggressive approach in interpreting this terminology, which has led to both confusion and inconsistency as to the degree of physical presence required to establish nexus for sales/use taxes.
Three states, Alabama, Vermont, and South Dakota, have pushed the proverbial sales tax nexus envelope over the edge by taking the position that “economic nexus” is the standard for sales tax nexus. This position appears in direct conflict with Quill
adopted an “economic nexus” standard (i.e., no physical presence required by seller) that requires, as of January 1, 2016, out-of-state retailers to collect sales tax on sales made to Alabama customers if the seller generates over $250,000 per year in sales to Alabama residents and engages in one or more of the following activities in the state:
- Maintains, occupies, or uses an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business;
- Qualifies to do business or registers with the state to collect tax;
- Employs or retains under contract any representative, agent, salesman, canvasser, solicitor, or installer for the purpose of selling, delivering, or the taking of orders for the sale of tangible personal property or any taxable services;
- Solicits, pursuant to a contract with a broadcaster or publisher located in this state, orders for tangible personal property by means of advertising that is disseminated primarily to consumers located in the state and only secondarily to bordering jurisdictions;
- Solicits orders for tangible personal property by mail if the solicitations are substantial and recurring and if the retailer benefits from any banking, financing, debt collection, telecommunication, or marketing activities occurring in this state or benefits from the location in this state of authorized installation, servicing, or repair facilities;
- Has, under a franchise or licensing arrangement or contract, a franchisee or licensee operating under its trade name;
- Solicits, pursuant to a contract with a cable television operator located in the state, orders for tangible personal property by means of advertising which is transmitted or distributed over a cable television system in the state;
- Solicits orders for tangible personal property by means of a telecommunication or television shopping system which is intended by the person to be broadcast by cable television or other means of broadcasting, to consumers located in the state;
- Maintains any other contact with the state that would allow this state to require the seller to collect and remit the tax due under the provisions of the Constitution and laws of the United States; or
- Distributes catalogs or other advertising matter and by reason thereof receives and accepts orders from residents within the state.
has adopted a sales tax “economic nexus” standard that requires out-of-state vendors to register, collect, and remit Vermont sales tax on taxable sales if the vendor:
Has Vermont taxable sales of at least $100,000, or has 200 or more individual transactions with Vermont customers during any 12 month period; and
- Engages in regular, systematic, or seasonal sales of tangible personal property in the state by the display of advertisements, the distribution of catalogues, periodicals and flyers, or by radio, television, mail, Internet, telephone, computer database, cable optic, cellular, or other communication systems.
The Vermont economic nexus standard is effective on the later of July 1, 2017 or beginning on the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement established in Quill
. The notification requirements are effective on the earlier of July 1, 2017 or beginning on the first day of the first quarter after the Colorado sales and use tax reporting requirements are implemented by the state.
passed a new law that imposes collection and remittance duties on certain remote sellers that sell tangible personal property, products transferred electronically, or services for delivery into the state that meet one of two economic thresholds in either the previous or current calendar year:
- The seller’s gross revenue from South Dakota sales exceeds $100,000; or
- The seller had more than 200 separate sales into South Dakota.
While it appears each of the above states’ new nexus standard is unconstitutional based on Quill, most practitioners believe the states want the Court to re-evaluate the nexus standard they set 24 years ago.
Use Tax Reporting/Notification
Use tax is imposed on the buyer of taxable goods when sales tax was not collected by the seller. This situation typically applies when the seller does not have nexus in the state where purchaser is located. The problem many states face is that most buyers (particularly individuals) do not comply with their use tax obligations. This lack of compliance has led some states to pass legislation that requires out-of-state sellers to report certain in-state sales information to a state’s department of revenue/taxation and/or buyers.
The following states currently have notification requirements:
– Since 2010, Colorado has required non-collecting remote sellers that make at least $100,000 in Colorado gross sales in a calendar year to give notice to all Colorado purchasers that Colorado sales or use tax is due on all non-exempt purchases. It also required sellers to provide an annual report of these sales to the Colorado Department of Revenue, with details including purchaser names, addresses, and sales amounts. Enforcement of the law is currently on hold under a litigation-related injunction.
– Businesses that are not registered to collect and remit South Dakota sales tax and have $100,000 or more in sales to South Dakota residents are required to provide notice to customers that South Dakota use tax is due. The state has specific rules regarding the information that must be disclosed and the methods of notifying customers of their use tax obligations.
- Retailers that are not registered to collect and remit Oklahoma sales tax and have $100,000 or more in sales to Oklahoma residents are required to notify such residents that use tax is due. Notification must be plainly visible on the company’s retail websites or catalogs, and invoices.
- Retailers that are not registered to collect and remit Kentucky sales tax and have $100,000 or more in sales to Kentucky residents are required to notify such residents that use tax is due. Notification must be plainly visible on the company’s retail websites or catalogs, and invoices.
Louisiana and Vermont have also passed similar use tax notification and/or reporting requirements that will go into effect by July 1, 2017.
States continue to try and expand their ability to require out-of-state businesses to register, collect, and remit sales tax on taxable sales to in-state residents. While the change in policies/law in these states may or may not be constitutional, one thing is certain: there is significant confusion among retailers on their tax reporting requirements. Given this confusion, it is more important than ever that a business evaluates their nexus footprint and understands the laws in each state where they may have a registration, collection, remittance, and reporting responsibility.
Written by: David Seiden and Michael Freel