States continue to pass legislation to force out-of-state retailers to register, collect, and remit sales tax on taxable sales made to in-state residents. A number of states have passed laws that require out-of-state retailers to collect sales tax, despite not having any in-state physical presence, which appears to violate the U.S. Supreme Court’s decision in Quill Corporation v. North Dakota (504 U.S. 298).
If a business has sales to customers in states in which it does not currently collect sales tax, the business may need to take some, or all, of the following steps in order to avoid potentially significant tax penalties:
- Register to collect sales tax in new states.
- Add “use tax” notification language on its sales invoices.
- Add language to its website for on-line orders.
- Set up new procedures to track the names, addresses and amount of sales made to each customer in each state per year.
- Set up new procedures to mail information reports to customers and certain state tax departments.
Since the 1992 U.S. Supreme Court ruling in Quill, a business has 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.
Several states, including Alabama, Minnesota, Vermont, South Dakota, Tennessee and Wyoming, 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 to be in direct conflict with Quill. Specifically:
Alabama 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 certain activities in the state.
Minnesota adopted an “economic nexus” standard that requires out-of-state retailers to collect sales tax on sales made to Minnesota customers if the seller engages in certain activities in the state and, either (1) makes 100 or more retail sales into the state during 12 consecutive months or, (2) makes 10 or more retail sales totaling more than $100,000 during 12 consecutive months.
Vermont 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. Vermont, however, also has separate notification requirements that will go into effect on July 1, 2017.
South Dakota 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 following 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
Enforcement of the South Dakota law has been suspended due to an injunction, since the state brought a declaratory judgment action against 200+ retailers. A South Dakota trial court recently ruled that the law is unconstitutional, but the state is expected to appeal the case to the South Dakota Supreme Court.
Tennessee issued a regulation that says remote sellers who engage in regular and systematic solicitation of Tennessee consumers, and have sales exceeding $500,000 during the previous 12 month period, must register for sales and use tax purposes by March 1, 2017 and begin collecting/remitting tax by July 1, 2017.
Wyoming passed a new law that mirrors South Dakota’s and will go into effect on July 1, 2017.
While it appears each of the above states’ new nexus standard is unconstitutional based on Quill, most practitioners believe the states want the U.S. Supreme Court to re-evaluate the nexus standard they set 25 years ago.
A number of state legislatures have also taken a “we don’t care what Quill says” stance. At least 15 other states have introduced their own “economic nexus” legislation during the 2017 legislative session that, if enacted, would impose collection and remittance requirements on remote sellers meeting certain criteria.
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 the 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:
Colorado – Colorado’s current law requires, as of July 1, 2017, 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. The current law also requires sellers to provide an annual report of these sales to the Colorado Department of Revenue, with details including purchaser names, addresses, and sales amounts.
South Dakota – 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. As noted above, this law has been found to be unconstitutional by a state trial court, but is expected to be appealed.
Oklahoma - 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.
Kentucky - 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 – Both states have also passed similar use tax notification and/or reporting requirements that will go into effect by July 1, 2017.
In addition, there are at least 8 states that have recently introduced legislation to impose use tax notification and/or reporting requirements on remote sellers, including:
- New Jersey
- Rhode Island
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 collection and reporting requirements. Given this confusion, it is more important than ever for a business to evaluate its nexus footprint and understand the laws in each state where it sells products and services.
About the authors: David Seiden is a leading authority on state and local tax (SALT) matters. He is a partner based in Citrin Cooperman’s New York office, where he leads the firm’s SALT Practice. He can be reached by phone at (212) 225-4447 or via e-mail at email@example.com. Mike Freel is a manager in Citrin Cooperman’s SALT practice. He can be reached by phone at (914) 949-2990 or via e-mail at firstname.lastname@example.org. Citrin Cooperman is a full-service accounting and business consulting firm headquartered in New York City with offices in White Plains, NY; Norwalk, CT; Long Island, NY; Bethesda, MD; Livingston, NJ; Braintree, MA; Woburn, MA; Philadelphia, PA and Providence, RI.