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To date, Ohio has not issued any written guidance regarding remote sellers’ obligations to collect and remit Ohio use tax on sales to Ohio customers following the Supreme Court’s decision in Wayfair v. South Dakota on June 21, 2018. As a result, remote sellers who do not have a physical presence in Ohio are left to discern on their own under what circumstances they are required to collect Ohio use tax from their customers and remit that tax to the state.
On the day the decision was announced, the Ohio Tax Commissioner issued a statement that the decision had no immediate impact on Ohio. However, the Ohio use tax nexus statute, R.C. 5741.01(I), contains a provision stating that the Department of Taxation can require a remote seller to collect and remit Ohio use taxes under any set of circumstances allowed by Section 8 of Article I of the Constitution of the United States (the Commerce Clause). Because the Wayfair decision clearly and fundamentally changed what was required under the Commerce Clause for a remote seller to have nexus by overturning the Quill physical presence requirement and adopting an economic presence standard, it could be argued that remote sellers with no physical presence in Ohio could now be required to collect and remit use tax without any further legislation or action by the state, at least those remote sellers that meet the threshold found to establish sufficient nexus in Wayfair.
That potential argument, however, is clouded by the fact that the Tax Commissioner issued Information Release ST 2001-01 in 2001, which was last updated in 2017, that sets forth standards or thresholds the Department of Taxation will use to determine whether a remote seller is subject to a use tax collection responsibility. The Information Release details the activities by or on behalf of a remote seller that will be presumed to create nexus with Ohio, which largely tracks the statute, and then sets forth safe harbor activities where the Department will not require a remote seller to collect and remit use tax from its customers if those activities are the seller’s only contacts with Ohio. The Information Release and all updates were written prior to Wayfair when physical presence was the test for use tax nexus. Thus, all the safe harbors contain some level of physical presence, some of which also contain a minimum gross receipts threshold.
The Department has indicated informally that it will continue to apply the physical presence tests set forth in the statute and Information Release along with the safe harbors, notwithstanding Wayfair, until such time, if ever, the Ohio General Assembly enacts legislation adopting economic nexus. Remote sellers need to be cautious because this unwritten position could be changed by the current Tax Commissioner or by the next Tax Commissioner, who is likely to be appointed by the next governor, who takes office in January 2019.
A remote seller might make an argument that the Tax Commissioner is estopped from changing that position while the Information Release is still in effect, but that argument would probably have little chance of success. Initially, Ohio case law has consistently applied estoppel against the state only in very limited circumstances. Although an Information Release of the Tax Commissioner might be viewed by the courts to fall within these limited circumstances, a second and more difficult fact to overcome is that the Information Release specifically states that it may be modified by court decisions. The Wayfair decision would certainly qualify as changing the use tax nexus jurisprudence.
While the current or new Tax Commissioner is likely to apply any change of position prospectively from the date such change is announced, that is not a certainty. Particularly given the statement in the Information Release regarding court decisions, the current or new Tax Commissioner could potentially decide to apply the economic nexus standard enunciated in Wayfair from the date of the decision.
As the above discussion indicates, remote sellers face a risky decision. Do they follow the guidance in the Information Release and risk a chance of the current or new Tax Commissioner changing his unwritten position, and potentially apply the economic presence standard of Wayfair retrospectively back to at least the date of the decision or do they take the safer option of registering and collecting and remitting use tax to Ohio?
It is our understanding that the Department of Taxation will not allow a prospective only voluntary disclosure for remote sellers with only economic nexus, which would allow taxpayers to register and start collecting tax while closing off the past.
Businesses should review their facts and weigh their options before registering in Ohio (or any other state). If you like to discuss Ohio’s or other states’ nexus standards, please contact Rich Farrin or any of our State and Local Tax professionals.