Remote Seller Nexus Chronicles - The Push for Retail Equality: Is There Strength in Numbers?
Introduction
This SALT Buzz will be tracking the states’ efforts to create a sales tax nexus standard that does not require a physical presence, which contradicts the U.S. Supreme Court’s decision in Quill Corporation v. North Dakota, 504 U.S. 298 (May 7, 1992). The number of states enacting remote seller laws is growing rapidly, and the old adage “there is strength in numbers” may prove true if they are able to force the Supreme Court to revisit its decision in Quill. Until that happens, we can expect states will continue to pass laws designed to force internet retailers and other remote sellers into “voluntary” compliance.
June 18, 2018
Iowa
Iowa Governor Kim Reynolds signed Senate File 2417 into law last month. The legislation includes new provisions that extend the State's sales and use tax base to reach marketplace facilitators, referrers, and remote sellers who may not have previously been subject to the State's sales tax collection requirements. In addition to economic sales thresholds that echo many other states' remote seller laws, Iowa incorporated provisions regarding the use of "in-state software" and content distribution networks (CDNs) that could also trigger nexus and the obligation to collect tax.
Effective January 1, 2019, remote sellers, marketplace facilitators, or referrers are required to register with the Iowa Department of Revenue to collect sales tax if they meet either of the following thresholds:
Generates gross revenue from Iowa sales of $100,000 or more in the immediately preceding or current calendar year; or
Makes sales to Iowa purchasers in 200 or more separate transactions in the immediately preceding or current calendar year.
Additionally, persons utilizing in-state software or CDNs to facilitate Iowa sales could also be subject to tax collection requirements unless they have less than $100,000 in gross revenue from Iowa sales. Notably, the State explicitly references website 'cookies' as the type of "software or data files" that could trigger nexus; apps and other software downloaded or stored on devices located in Iowa for the purpose of facilitating sales could also trigger nexus under the new law.
Referrers that would be required to register with the Department under the law may choose to adhere to strict notice and reporting guidelines in lieu of registering to collect tax.
Regarding marketplace sales, the new law clearly states that a marketplace facilitator must collect tax on all taxable sales made or facilitated by the marketplace facilitator - including sales made on behalf of a marketplace seller. The new law also states, however, that a marketplace facilitator is deemed to be an agent of any marketplace seller making retail sales through the marketplace facilitator, suggesting that marketplace sellers may be held severally liable for tax not collected by a marketplace facilitator. Once this new law takes effect, it would be wise for marketplace sellers to confirm that marketplace facilitators are collecting tax on their behalf, or risk potential tax exposure.
Georgia
Governor Nathan Deal signed House Bill 61 into law on May 3, 2018, which expands the State's definition of "dealer" to include certain out-of-state retailers that make sales into the State. Effective January 1, 2019, retailers with no physical presence in the State would fall under the definition of "dealer" if they do either of the following:
Generate more than $250,000 in gross receipts from retail sales of tangible personal property delivered into Georgia electronically or physically for the current or previous calendar year; or
Conduct 200 or more separate retail sales of tangible personal property delivered into the State electronically or physically in the previous or current calendar year.
Sellers that do not collect Georgia sales tax but meet one of the criteria above are known as "delivery retailers." The new law provides that delivery retailers must register with the State for tax collection, or comply with strict notification and reporting guidelines outlined in the law. Penalties for failure to comply with the notification and reporting guidelines will be assessed on a per instance basis once the law becomes effective on January 1, 2019.
Oklahoma
Oklahoma recently enacted House Bill 1019 (HB 1019) which requires remote sellers, marketplace facilitators, and referrers to register for tax collection, or comply with notice and reporting requirements set forth in the new law. Effective July 1, 2018, a remote seller, marketplace facilitator, or referrer that has aggregate taxable Oklahoma sales of $10,000 or more during the immediately preceding 12-month period must make an election to register for tax collection or comply with notice and reporting requirements set forth in the legislation.
Remote sellers, marketplace facilitators, or referrers have the option to change their election each fiscal year on or before June 1 for the succeeding year, however, persons electing to comply with the notice and reporting requirements may change their election at any time by registering with the Tax Commissioner to being collecting and remitting Oklahoma tax.
Remote sellers, marketplace facilitators, and referrers failing to comply with the new law will be subject to penalty in the amount of 20% of their total Oklahoma sales in the prior 12-month period, not to exceed $20,000. Not registering for tax collection is considered an automatic election to comply with the notice and reporting requirements set forth in HB 1019 and, therefore, could lead to hefty fines for businesses that take no action when the law becomes effective on July 1.
Kentucky
Kentucky House Bill 487 (HB 487), which extends the Commonwealth's tax base to reach certain remote sellers ("remote retailers"), became law on April 27, 2018. The bill passed without Governor Matt Bevin's signature. HB 487 contains provisions that expand the Commonwealth's definition of "retailer engaged in business in this state" to include remote retailers with no physical presence in the State that meet either of the following thresholds:
Sold tangible personal property or digital property delivered or transferred electronically into Kentucky in 200 or more separate transactions in the previous or current calendar year; or
Generated gross receipts over $100,000 from the sale of tangible personal property or digital property delivered or transferred electronically into Kentucky in the previous or current calendar year.
The State's new law requiring certain remote retailers to collect tax comes approximately five years after enacting reporting and notification laws similar to those introduced by Colorado in 2010. Notably, however, Kentucky did not impose any penalties for noncompliance with the notification laws. The provisions requiring certain remote retailers to register for tax collection went into effect immediately upon HB 487 becoming law. The penalties associated with noncompliance by remote sellers meeting one of the criteria above would be the same as those enforced on other retailers engaged in business in the State.
Alabama
Beginning January 1, 2019, remote sellers utilizing online marketplaces to sell into the State may no longer need to worry about whether their contact with Alabama creates substantial nexus, and a tax collection and remittance obligation. House Bill 470 (HB 470), passed April 6, 2018, requires marketplace facilitators with sales into the State over $250,000 to either register to collect and remit Alabama simplified sellers use tax, or comply with notification and reporting requirements. Marketplace facilitators that choose to collect Alabama tax will be required to collect tax on sales made on their own behalf, as well as sales made on behalf of marketplace sellers. Marketplace sellers will be relieved of any potential tax liability that could be asserted against them on sales for which the marketplace facilitator has collected and remitted the tax.
To date, Alabama has not enacted any legislation targeted directly at remote sellers who do not have any physical contact or related entities inside the State.
Pennsylvania
Earlier this year, provisions of the Marketplace Sales Act (Act 43 of 2017, the "Act") went into effect. The Act appends the Commonwealth's Tax Reform Code of 1971 to address sales made by marketplace facilitators, remote sellers, and referrers. Under the Act, certain marketplace facilitators, remote sellers, and referrers are required to make an election to either register with the Commonwealth to collect and remit tax on their sales delivered into Pennsylvania, or comply with notice and reporting requirements set forth by the Act.
The Pennsylvania Department of Revenue required marketplace facilitators, remote sellers, and referrers, who do not maintain a place of business in the Commonwealth, but had aggregate taxable sales delivered into Pennsylvania of $10,000 or more in the prior 12-month period, to elect to register for tax collection or comply with notice and reporting requirements by March 1, 2018. Sellers subject to the Act were required to begin collecting tax, or comply with the notice and reporting requirements, starting April 1, 2018.
Remote sellers, marketplace facilitators, and referrers failing to comply with the Act will be subject to a penalty of 20% of their total Pennsylvania sales in the prior 12-month period, or $20,000 per violation, per year, whichever is less. Not registering for tax collection is considered an automatic election to comply with the notice and reporting requirements set forth in the Act. Remote sellers who are not registered to collect tax in Pennsylvania, but make sales into the Commonwealth, should evaluate whether they are required to comply with the notice and reporting requirements, or risk the potentially hefty penalties associated with noncompliance.
It is important to note that "marketplace sellers" (remote sellers with no physical presence in the Commonwealth and who sell into Pennsylvania only through online marketplaces) are not required to make an election, as the burden is on the marketplace facilitator to comply with the Act.
February 26, 2018
Marketplace Sellers Beware
Remote sellers have long relied on the physical presence requirement upheld in Quill v. North Dakota to avoid tax collection in states where they make remote sales. However, based on recent business practices, some remote sellers may have unknowingly triggered physical presence and created a substantial tax liability for prior years. Remote sellers that sell items through popular online marketplaces, such as Amazon.com, need to quickly determine if those relationships have created nexus for them throughout the United States.
Amazon and some competitors have established strategically placed distribution warehouses, known as "fulfillment centers," all over the world. For instance, it is reported that Amazon has more than 100 fulfillment centers in the United States alone. The fulfillment center approach has been extremely effective for delivering products to consumers in record time, however, that approach may also create substantial tax obligations for marketplace sellers utilizing fulfillment services such as Amazon's Fulfillment by Amazon (FBA) program or other similar distribution channels.
For example, through its FBA program, Amazon directs participating sellers to send bulk shipments of frequently purchased items to Amazon fulfillment centers located throughout the United States. When a customer places an order for the seller's item via Amazon.com, Amazon ships the product directly from one of their fulfillment centers on the seller's behalf without delay. Sellers utilizing this program may have inadvertently established a physical presence in any state where they have inventory stored in an Amazon fulfillment center.
Physical presence established through fulfillment programs may be of no consequence if the Court overrules Quill in Wayfair. If Quill is upheld, however, we can expect states to put pressure on Amazon to turn over information on their marketplace sellers. This initiative has already been demonstrated as published reports indicate that Amazon turned over seller information to both Massachusetts and Rhode Island earlier this year.
As the states become more aggressive in their efforts to enforce tax collection on remote sellers, by any means necessary, such sellers should reevaluate which states they may be obligated to collect sales tax and consider voluntary disclosure programs or amnesty programs to resolve or limit any past exposure.
If you would like to discuss nexus, voluntary disclosure or amnesty programs, please contact Jason Walker, John Trippier, Richard Farrin or any professional at Zaino Hall & Farrin.
January 18, 2018
The State of South Dakota’s fight against Quill has reached its final chapter. On Friday, January 12, 2018, the U.S. Supreme Court agreed to hear South Dakota v. Wayfair. The case will force the Court to revisit the physical presence requirement for sales tax, which was reaffirmed by Quill in 1992, when the global digital marketplace created by the internet was still in its infancy.
South Dakota has been on the forefront in the fight against Quill since 2016, when the state enacted legislation requiring certain out-of-state sellers with no physical presence in the state to collect and remit state sales tax. Wayfair LLC, Overstock.com Inc., and Newegg Inc. challenged the state head on in Wayfair and have been victorious over the state to date, based on the South Dakota state courts' reliance on Quill. The U.S. Supreme Court is expected to issue its opinion by the end of the current term. Did the High Court decide to hear Wayfair so it can revisit and overrule Quill? Stay tuned.
September 20, 2017
South Dakota Update
The South Dakota Supreme Court ruled against the State of South Dakota on August 13, 2017 in South Dakota v. Wayfair, thereby affirming the state Circuit Court's decision and upholding the physical presence requirement set forth by Quill Corp. v. North Dakota, 504 U.S. 298 (1992). This result was expected and was critical to the state’s grand plan for a review of Quill by the U.S. Supreme Court. The state is expected to appeal this decision to the U.S. Supreme Court next month in hopes the Court will hear the case and revisit the 1992 holding that a seller must have in-state physical presence to enforce sales tax collection.
This milestone marks an important step in the fight against Quill and sets the stage for the U.S. Supreme Court to revisit the physical-presence standard that has been precedent in state nexus cases for 25 years.
Massachusetts
Massachusetts wasted no time proposing a new regulation that mirrors rescinded Directive 17-1 (discussed here). The regulation is expected to be published in the Massachusetts Register two days from now on September 22, 2017, at which point it will be made official and have the force and effect of law. Regulation 830 CMR 64H.1.7: Vendors Making Internet Sales (Regulation), provides official guidance to sellers with no brick-and-mortar presence in the state, but who make sales into the state via the Internet. The Regulation discusses activities and thresholds that could require internet sellers to collect Massachusetts sales tax.
Massachusetts' new regulation distinguishes modern-day internet vendors from mail-order catalogue company Quill Corp., from Quill, by asserting that internet vendors "invariably" have physical presence in the state by means of in-state software or data ("apps" and "cookies"), use of in-state content distribution networks (CDN), or by selling goods through online marketplaces. The state maintains that internet vendors are using these items, services, and relationships for the purpose of facilitating and enhancing in-state sales and market presence, and that they satisfy the requirement of in-state physical presence required by Quill.
Effective September 22, 2017, internet vendors that have contact with the state through one of the channels discussed above must register to collect and remit Massachusetts sales or use tax provided they made over $500,000 in sales into the state and in 100 or more transactions over the preceding 12-month period. The evaluation period for this threshold changes to a prior-calendar-year basis beginning January 1, 2018.
Massachusetts has taken steps to shield the Regulation from certain criticism by setting its bright-line sales threshold high enough (in their opinion) to satisfy the Due Process Clause of the U.S. Constitution should it come into question. Further, they've included language meant to overcome provisions of the Internet Tax Freedom Act put in place to protect internet sellers from discriminatory state taxation.
Rhode Island
Rhode Island took a huge step forward in enforcing tax collection on remote sellers on August 3, 2017, when Am. Sub. HB 5175, was signed into law. The bill codifies a new chapter into Rhode Island's general laws dedicated solely to remote seller tax collection and reporting requirements. R.I. Gen. Laws 44-18.2, Sales and Use Tax -- Non-Collecting Retailers, Referrers, and Retail Sale Facilitators Act, addresses remote sellers' tax collection obligations when selling into the state.
The crux of the state's argument is that technology has progressed far enough that tax collection on interstate commerce is no longer an undue burden on remote sellers. The state references their participation in the Streamlined Sales and Use Tax Agreement and argues that it provides an avenue for streamlined tax compliance. The new law proceeds to clarify the state’s position regarding what activities constitute in-state physical presence, establish nexus, and establish a market in the state.
Rhode Island cast an extremely wide net in their new law by compiling a seemingly all-inclusive list of activities that may create nexus and oblige a remote seller to collect tax. The new law addresses many familiar concepts that establish nexus with the state: in-state software (apps and cookies), targeted marketing, selling through online marketplaces, and click-through nexus are examples. Entering into agreements with third-parties, "referrers" and "retail sales facilitators," who engage in these and similar activities may also create nexus for remote sellers. Sellers having contact with the state through any of these channels are deemed "non-collecting retailers" and may be subject to tax collection requirements provided they meet certain sales thresholds. Referrers and Retail Sales Facilitators are also subject to provisions of the new law.
Effective August 17, non-collecting retailers are required to register to collect and remit state sales tax, or adhere to strict reporting and notification requirements, if they meet either of the following thresholds in the preceding calendar year:
Had gross revenue from the sale of taxable goods or services delivered into the state equal to or exceeding one hundred thousand dollars ($100,000); or
Sold taxable goods or services delivered into the state in two hundred (200) or more separate transactions.
ZHF Observations
The State of Rhode Island claims their participation in the Streamlined Sales and Use Tax Agreement lifts the undue burden created by enforcing tax collection on interstate commerce. Their claim appears to stem from a program within the Streamlined Sales Tax (SST) Project, whereby a "volunteer seller" can receive sales tax collection software and return filing service free of charge from a Certified Service Provider (CSP) if they agreed to register for tax collection through the Streamlined Sales Tax Governing Board. Under the program, the tax collection software, implementation, and return filing services are provided free to the seller, and the CSP is compensated for their services by the participating state.
It should be noted that enactment of Chapter 18.2, may exclude non-collecting retailers from the definition of "volunteer seller," meaning the CSP would no longer receive compensation from the state under the agreement and will likely seek compensation from the seller. Consequently, non-collecting retailers could incur significant fees when implementing sales and use tax collection procedures for Rhode Island. The program also requires sellers to register in all 23 member states of the Streamlined Sales and Use Tax Agreement, possibly causing the seller to incur even more substantial fees related to tax compliance in other states.
Sales tax collection software may become more and more appealing as states continue to impose tax collection requirements on remote sellers. The issues surrounding the Streamlined Sales and Use Tax Agreement and the CSP program extends beyond Rhode Island to all SST states that recently imposed remote seller laws. Several important questions remain: Are remote sellers recently subjected to new sales and use tax collection/reporting requirements still considered volunteer sellers? If not, at what point does the potentially high cost associated with implementing tax collection across 23 states constitute an undue burden?
With an increasing number of states relying on information technology to overcome the decision in Quill and support the enforcement of tax collection, businesses should take a closer look at how their website structure, CDN provider, or third-party marketplace seller will affect their sales and use tax liability.
July 25, 2017
Ohio Update
The proposed changes to the Ohio Revised Code (O.R.C.) discussed in the May 17, 2017 Buzz below, that would have required sellers with no physical presence in the state to register to collect and remit tax, have been stricken from the state’s '18/19 operating budget. Other language, however, has been added to Am. Sub. House Bill 49 (the Bill) that serves the same function. The Bill, signed by Governor Kasich on June 30, 2017, contained changes to O.R.C. 5741.01(I)(2) that will require out-of-state sellers to register for tax collection if they are engaged in certain activities that are now presumed to establish the seller has "substantial nexus" with the state.
The Bill enacted two new provisions, effective January 1, 2018, that allow the state to presume a seller has substantial nexus with the state provided the following criteria are met:
Gross receipts from the sale of tangible personal property or services to Ohio consumers of more than $500,000 in the current or preceding calendar year; and
Uses in-state software to sell or lease taxable tangible personal property or services; or
Provides website information to consumers through an in-state content distribution network.
There has been some debate about exactly what constitutes in-state "software" and whether small pieces of data, such as "cookies," constitute vendor software stored on a consumer's computer. The state defines "computer software" to mean "a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task." O.R.C. 5731.01(BBB).
What is a 'cookie?'
In short, a cookie is a text file stored on a consumer's computer that contains information specific to that user's internet browsing history or past activity. Websites can place cookies onto a consumer's device to help improve their overall browsing experience, or for other reasons. For example, cookies allow a user's username and password to be generated automatically when they visit a particular website. Cookies are also what enables a seller to keep items in a customer's 'shopping cart' when they return to a website after closing their internet browser. Essentially, a cookie is an electronic identification card that only the creator and placer of the cookie can read.
Whether a "cookie" would be considered software is open to debate. Although the file may not cause any processes to be performed on the consumer's computer, it could be argued that the file causes processes to be performed on the provider's computer. On the other hand, if a cookie does not contain coded instructions (in the traditional sense of computer programming), rather only a unique signature specific to a consumer, cookies may fall out of the definition of computer software.
Content Distribution Network - briefly explained:
A content distribution network (CDN) is a way for businesses to get website information to their consumers faster. Rather than a consumer's computer located in Pittsburgh fetching website data from company-owned servers located in Seattle, a content distribution network allows for the data to be fetched from a server located in Philadelphia that is maintained by a CDN provider. The result is much faster website load times and a more positive experience for the consumer. CDN providers typically have a vast network of primary and auxiliary servers located across the country (or world) aimed at delivering web content to consumers as fast as possible.
Below are a few network services providers that hold themselves out to be providers of CDN services and likely maintain servers in Ohio:
Level 3
Total Server Solutions
Amazon CloudFront
Additionally, network services provider Fastly, who also maintains a CDN, plans to open a data center in Ohio in the future. CDN giant Akamai may also maintain servers in the state, however, they do not make the locations of their network servers publically available. Based on the new law, remote sellers meeting the state sales threshold and utilizing a CDN to deliver web content to their customers should contact their provider to confirm whether they maintain servers in Ohio.
Massachusetts Update
On June 28, 2017, the state issued Directive 17-2, effectively revoking Directive 17-1 issued less than two months prior. Directive 17-1 required out-of-state vendors to collect and remit sales tax if they had more than $500,000 in Massachusetts sales and in more than 100 transactions in the preceding 12 months. Directive 17-2 has been issued in anticipation of the Department of Revenue proposing a regulation that will mirror Directive 17-1, but follow the rule making process as required by the state's General Law.
Nebraska Update
Nebraska Senator Ernie Chambers successfully filibustered Legislative Bill (L.B.) 44, which would have required remote sellers to collect and remit the state's sales tax or adhere to reporting requirements about sales made into the state. L.B. 44 was introduced by Sen. Dan Watermeier January 5, 2017 and received overwhelming support by the Senate before coming to an abrupt halt. It is likely Sen. Watermeier will reintroduce a similar bill next year.
Maine
The Maine Legislature voted to override Governor Paul LePage's veto of Senate Paper (S.P.) 483, which requires remote sellers to collect tax if they have more than $200,000 in taxable Maine sales or 200 or more separate transactions delivered into the state in the previous or current calendar year. The enacted language in S.P. 483 is practically identical to that used in South Dakota's remote seller law, including the requirement for a direct appeal to the state's Supreme Judicial Court. The new law becomes effective October 1, 2017 and does not reference any physical presence requirement, by software or otherwise, for a remote seller to be required to collect and remit tax provided the previously stated thresholds are met.
New Reporting Requirements Adopted by Several States
Colorado
Colorado pioneered the effort to force out-of-state retailers and remote sellers to notify purchasers of their obligation to pay use tax to the state with legislation introduced in 2010. Action was quickly brought against the state under the premise that the law placed undue burden on interstate commerce. After the Supreme Court issued a ruling earlier this year, that upheld Colorado's new law, the door was opened for other states to follow suit.
Colorado’s notification requirements affecting retailers that do not collect the state’s sales tax went into effect earlier this month. Effective July 1, 2017, a "[r]etailer that does not collect Colorado sales tax," and who had total gross sales to Colorado purchasers in excess of $100,000 in the prior calendar year, must comply with a lengthy list of reporting and notification requirements set forth by Colorado Revised Statute 39-21-112.3.5(c).
Below are some notable exclusions contained within Regulation 39-21-112.3.5 that clarifies the law:
A “retailer that does not collect Colorado sales tax” does not include retailers that only make sales in Colorado by means of downloaded digital goods or software.
A Colorado purchase does not include purchases or rentals of DVDs or other video materials that disclosure of the purchasers of such items would violate 18 U.S.C. 2710.
Total gross sales does not include the sale of services.
Louisiana
Last year, the Louisiana Governor signed House Bill 1121 into law, requiring remote sellers that do not register and collect Louisiana sales tax ("remote retailers") to comply with new reporting and notification requirements provided certain thresholds are met. The act became effective this month and, thus, effective July 1, 2017, remote retailers making more than $50,000 of retail sales of tangible personal property or taxable services, per calendar year, into the state must do the following:
Notify Louisiana purchasers that their purchases may be subject to Louisiana use tax, as well as the method for reporting the tax and the timeframe in which it is due; and
Provide Louisiana purchasers, by January 31, a report that contains the total amount of their purchases from the retailer in the preceding calendar year, in addition to other language and information that must be contained in the report.
Provide the state, by March 1, an annual statement for each purchaser that includes the total amount paid by the purchaser in the immediately preceding calendar year. Additionally, the state may require these statements be filed electronically by remote retailers that have over $100,000 of sales into the state.
Louisiana has been on the forefront of action against remote sellers. The provisions above complement last year's expansion of the state's definition of persons required to collect tax, by which click-through and affiliate nexus were added to Louisiana statute.
Vermont
Two new laws recently became effective earlier this month that affect out-of-state vendors and other "noncollecting vendors." The following legislation was passed in May 2016 and became effective July 1, 2017:
The state’s definition of "vendor" was expanded to include vendors located outside the state that 1) engage in regular, systematic, or seasonal sales of tangible personal property in the state and 2) made sales of $100,000 or more or 200 separate transaction into the state during the immediately preceding 12-month period; and
"Noncollecting vendors" are required to notify Vermont purchasers of their obligation to remit use tax to the state on their purchases. Additionally, by January 31, the vendor must provide Vermont purchasers, who have made over $500 in purchases in the previous calendar year, notification of the total amount of purchases made that may be subject to use tax and other information required by the state.
A "noncollecting vendor" is defined as a "vendor that sells tangible personal property or services to purchasers who are not exempt from the sales tax under this chapter, but that does not collect the Vermont sales tax." 32 V.S.A. 9701(54)
Washington
Washington State Governor Jay Inslee recently signed legislation into law that requires remote sellers, "marketplace facilitators," and "referrers," to comply with new registration or reporting requirements. Effective January 1, 2018, sellers that meet certain economic thresholds must either register to collect and remit the state's sales and business & occupation (B&O) taxes or adhere to information reporting requirements similar to those set forth by Colorado.
Puerto Rico
The Commonwealth of Puerto Rico recently passed legislation that requires vendors who sell into the commonwealth, through internet, catalog, television, or other means, but do not collect sales tax, adhere to new registration, reporting, and notification requirements. Effective July 1, 2017, the commonwealth expanded their definition of nexus-creating activities and persons engaged in business in the commonwealth to include sellers that create a substantial link with the commonwealth through marketing activities, and cause taxable items to be transported into Puerto Rico continuously, recurring, and in the ordinary course of business. Click-through nexus provisions have also been added to Puerto Rico's administrative law, which went into effect July 1, 2017.
Additionally, sellers not otherwise considered to be engaged in business in Puerto Rico, but sell to residents of the commonwealth through mail-order or ordered through any means, must comply with information and notification requirements by which they are required to notify Puerto Rico purchasers of their use tax obligation, among other information required by the commonwealth. These provisions also went into effect July 1, 2017.
In Summary
Businesses that make significant sales into any of these states should evaluate whether they are required by law to comply with new registration, reporting, or notification requirements. Failure to comply could result in hefty fines and penalties typically being applied under these laws on a per-transaction and per-statement basis. Puerto Rico, in particular, has very steep penalties associated with non-compliance.
If you would like to discuss whether your business may have potential compliance issues related to any of these new regulations, please contact a ZHF professional for more information.
May 17, 2017
Recently, Indiana, Massachusetts, Nebraska and Ohio have proposed or enacted legislative changes or issued administrative policy changes that could require out-of-state vendors to collect sales tax even though the vendors do not have a physical presence in the state.
Indiana
Indiana House Bill 1129 (H.B. 1129) requires remote sellers with no physical presence in the state to collect sales tax. H.B. 1129 passed the Indiana Senate and the Indiana House of Representatives with relative ease and was signed by the Governor. Beginning July 1, 2017, a retail merchant without a physical presence in the state will be required to register to collect and remit tax provided certain receipts and transaction thresholds are met for the current or previous calendar year. The state's new nexus thresholds are identical to the nexus thresholds enacted recently by both South Dakota and Wyoming: $100,000 or more in gross revenue generated from in-state activities, or 200 or more separate transactions delivered into the state.
Massachusetts
Massachusetts addressed the remote seller collection concerns through a change in its administrative guidance. Rather than proposing a new law, the Department of Revenue (Department) issued Directive 17-1 that clarifies their interpretation of what constitutes "physical presence." A "Directive" is akin to a regulation or administrative code; it is meant to provide clarification and guidance on current Department policy and statutory interpretation. Directives are intended to be relied upon by taxpayers when the circumstances and facts of a transaction are substantially similar to those presented in the Directive.
To overcome the physical presence requirements set forth in Quill, Massachusetts took a closer look at the technology side of internet sales to establish a basis for asserting that internet companies have a physical presence in the state. Massachusetts has taken the position that website "apps" and "cookies" automatically downloaded onto the purchaser's computer constitutes tangible personal property of the retailer. The Department also provides examples of how using online marketplaces may create physical presence (e.g., using a third party company that does have a physical presence in the state to assist with order fulfillment and to help maintain the sales market for the remote seller). The Department argues that these types of activities create an in-state "physical presence" for that retailer. Some practitioners argue that any software presence on a consumer's device is insignificant and not substantial enough to create nexus for the purpose of sales tax collection. Massachusetts may have anticipated this argument as the state included an economic threshold in their Directive that requires a larger portion of gross receipts than the nexus thresholds applied by most states but a lower threshold for the number of allowable transactions. The purpose of the higher gross receipts threshold appears to be twofold: establishing that the vendor does have substantial nexus in the state and satisfying the Due Process standard of the U.S. Constitution.
Directive 17-1 also states that effective July 1, 2017, a remote seller is required to collect sales tax if they made $500,000 or more in sales to in-state purchasers and made sales with delivery into the state in 100 or more transactions during the preceding 12-month period. Beginning January 1, 2018, the nexus threshold must be evaluated on a previous calendar year basis.
Nebraska
Nebraska's proposed method of taxing remote sales may change significantly. Senator Dan Watermeier is working to pass Legislative Bill 44 (L.B. 44), which would require remote sellers to register to collect and remit tax if they generate $100,000 or more in gross revenue from in-state activities, or have 200 or more separate transactions delivered into the state. Senator Watermeier believes L.B. 44 overcomes the constitutional issue of requiring a business without a physical presence in a state to collect sales tax by allowing remote sellers to comply with specific reporting and notification requirements (similar to Colorado) in lieu of voluntarily registering to collect and remit Nebraska sales tax. Nebraska Governor Pete Ricketts agrees that the issue of online sales tax collection (or lack thereof) must be addressed, but he has commented that it can only be handled properly at the federal level or by a change in the direction from the Supreme Court. Governor Ricketts comments may indicate that he will not sign L.B. 44. Alternatively, on April 18, 2017, Senator Ernie Chambers proposed to strike the portion of the bill that affords remote sellers the option to report and notify rather than be required to collect and remit. If Senator Chamber's proposed amendment to L.B. 44 is adopted, the constitutionality of the law could be in question, which may create additional hurdles for L.B. 44.
Ohio
Most recently, Ohio has joined the effort to push retailers to collect the sales tax. Sub. House Bill 49 (H.B. 49) proposes changes to Ohio Revised Code (O.R.C.) §5741.17 that define sellers who are required to register with the Ohio Department of Taxation for tax collection. These changes are among many amendments to the Revised Code introduced in the 4,675 page bill (discussed in last week's buzz) which will likely pass by June 30, 2017. Assuming the proposed changes to O.R.C. §5741.17 are adopted, remote sellers will be required to collect Ohio sales tax beginning January 1, 2018 if they have over $100,000 in Ohio gross receipts or 200 or more separate transactions delivered into the state in the current or previous calendar year. The proposed language would effectively eliminate the safe harbors found in O.R.C. 5741.17(A)(3) relating to the agency relationship with an Ohio telemarketing business and O.R.C. 5741.17(A)(4) owning specific printed product at an Ohio printer. Further, the language appears to require that businesses meeting the new thresholds are required to register even if those businesses make no taxable sales in Ohio.
March 29, 2017
Wyoming
Wyoming is the newest state to throw their hat into the ring of states challenging the physical presence requirements set forth in Quill. Earlier this month, Governor Mead signed into law House Bill 19 which becomes effective July 1, 2017. The law will require remote sellers that do not have physical presence in the state to register to collect and remit sales and use taxes provided certain thresholds are met.
South Dakota
As discussed in an earlier Buzz, below, South Dakota was the first state to mount a legislative challenge to the holding in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) that physical presence is required to meet the nexus prong of the Commerce Clause. The South Dakota legislation provides that an out-of-state seller has nexus in the state for sales and use tax collection purposes if it has either gross sales of more than $100,000 or more than 200 separate sales transactions delivered to South Dakota in a calendar year.
The South Dakota Sixth Judicial Circuit Court issued a summary judgment on March 6, 2017, holding that the law was unconstitutional under the decision in Quill. This was the expected result, because the ultimate goal of the state is to get the issue to the US Supreme Court, with the hope that the Court will reconsider and overrule Quill. To expedite the potential review, the law provides for a direct appeal to the South Dakota Supreme Court from the circuit court decision. From that court’s decision, which will presumably affirm the circuit court decision, South Dakota can seek review by the US Supreme Court. Of course, review by the US Supreme Court is discretionary and that Court has been reluctant to accept jurisdiction to review state nexus cases.
For more details on Wyoming and South Dakota court case please see South Dakota Challenge to Quill Inches Closer to Review by US Supreme Court; Wyoming Throws Hat Into the Ring
June 5, 2016
South Dakota
South Dakota Governor Dennis Daugaard has signed into law new sales and use tax nexus guidelines for the state of South Dakota. The new guidelines indicate that an out-of-state seller has nexus in the state for sales tax collection purposes if at least one of the following criteria is met:
The seller’s gross revenue from the sales of tangible personal property, any product transferred electronically, or services delivered into South Dakota in the previous calendar year or current calendar year exceeds $100,000; or
The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.
For more details on South Dakota please see South Dakota Latest State to Challenge Quill
We will be updating this buzz periodically with new issues regarding economic nexus, new state laws, and changes to the status of a Supreme Court review of the Quill decision. Please check back regularly to stay up to date on remote seller laws, or contact one of ZHF's tax professionals to discuss how economic nexus may be affecting your business.
