by Tram Le, Spreading SALTovation columnist for Tax Notes
Tram Le is a member of the SALTovation team at TaxOps and an adjunct professor at the University of Texas at Arlington. She writes about hot topics in state and local tax affecting business operations and growth strategies, and can be reached at tle@sarahf14.sg-host.com.
In this installment of Spreading SALTovation, Le discusses remote sellers and marketplace facilitators after Wayfair and questions whether new economic nexus rules are resulting in burdensome state tax responsibilities for these sellers.
Under South Dakota v. Wayfair Inc.,[1] the U.S. Supreme Court opened the doors for a state to require remote sellers and marketplace facilitators who do not have a physical presence in the state to collect and remit sales tax. One of the many reasons for overruling the physical presence requirement was to level the playing field for brick-and-mortar stores. However, giving states the authority to impose a collection and remittance duty on remote sellers based on the states’ economic nexus rules has made it a whole lot more difficult and costly for remote sellers to comply.
In response to Wayfair, states quickly adopted or enacted rules with similar thresholds to those in south Dakota to meet the substantial economic nexus requirement. Also, generally, states have avoided retroactive application of these laws. States moved quickly to capture tax on remote sales facilitated by online platforms or other remote marketplaces to target them to collect and remit tax on behalf of their marketplace sellers.
These safe harbor thresholds and requirements, however, are proving to be challenging for remote sellers and marketplace facilitators to comply with, and they create substantial compliance costs. Remote sellers are in a tough spot, chasing a moving target for compliance that requires constant monitoring by taxpayers, tax professionals, and tax automation providers. It raises a larger tax policy question whether, after Wayfair, the states’ economic nexus rules are resulting in burdensome tax responsibilities for remote sellers, many of which are in the dark or struggling to comply with complex sales tax rules and requirements.
Economic Nexus Rules
South Dakota’s economic nexus law provided a safe harbor for small sellers who transact only limited business in the state. In practice, the safe harbor has not benefited a lot of remote sellers and even has hindered them because of the complexity of state-by-state implementation. Under Wayfair, substantial nexus is created if a seller has economic presence in the state. Virtually all states that impose a sales tax (except Florida and Missouri) have adopted economic nexus rules similar to South Dakota’s threshold of $100,000 in annual gross sales or 200 transactions, with varying nuances and carveouts.[2]
In California, New York, and Texas, the sales thresholds go up to as high as $500,000. California and Texas do not include a transaction or invoice count threshold, while New York requires sales to exceed both $500,000 and 100 transactions to trigger economic nexus.[3] Then there are states somewhere in between. Alabama has an annual sales threshold of $250,000 with no transaction requirement.[4] Arizona implemented a graduated approach: The sales threshold is $200,000 for calendar year 2019, $150,000 in 2020, and $100,000 in 2021 and thereafter.[5]
On the other end, the Kansas Department of Revenue decided that no safe harbor is authorized under state tax law; instead, a single sale into the state sufficiently creates nexus.[6] Kansas administratively imposed economic nexus with no threshold on remote sellers even though its attorney general determined that the department lacks the authority to do so.[7] These conflicting positions create a great deal of confusion for remote sellers with Kansas customers.
Merely understanding the various sales and transaction thresholds in each state is not enough for remote sellers to comply with the economic nexus rules. To properly assess their responsibilities, remote sellers must know what to include in the sales or transaction threshold and what periods to track. In most states, the threshold is gross sales, receipts, or revenue and includes all sales. A few states include only retail sales, which includes all sales other than resale or sales that are subject to tax and would exclude exempt sales. Businesses must know whether their products and services are subject to sales tax on a state-by-state basis. Since states have differing tax bases and exemptions, vendors must know how each state will tax its products and services, which is extremely difficult since each state has vastly different rules regarding taxability of products and services.
In terms of tracking sales periods, most states include the previous or current calendar year from the effective or enforcement date. Alabama, Michigan, and Pennsylvania, for example, look to the previous calendar year to determine whether an online or remote seller has economic nexus.[8] Illinois looks at the preceding 12 months[9] and New York includes the preceding four sales tax quarters to make economic nexus determinations. Further demonstrating the potential confusion and complexity, the sales tax quarters in New York do not follow a calendar quarter but instead are: March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 28/29.[10]
When Remote Sellers Need to Register, Collect, and Remit Tax
The Supreme Court in Wayfair did not approve of retroactive application of the economic nexus law. South Dakota’s law did not allow retrospective enforcement, which would have held sellers liable for back taxes with little or no opportunity to collect those taxes from their customers. Following South Dakota’s lead, states are generally enforcing their economic nexus laws prospectively.
For example, New York’s economic nexus rules took effect June 21, 2018, the date of the Wayfair decision,[11] while in Texas, rules were effective as of January 1, 2019, but were not enforced until October 1, 2019.[12] In Louisiana, the enforcement date was July 1, 2020, which gave remote sellers more time to prepare.[13] States that enforced their rules immediately after Wayfair (such as New York) did not give remote sellers ample time to figure out the rules, and these sellers essentially may have been required to immediately register and begin collecting and remitting tax. States that do not provide for a future effective or enforcement date, or that require registration the next day or the next transaction after exceeding a threshold, could expect taxpayer challenges claiming the constant changes in rules and requirements have the same effect as retroactive collection.
States have also been changing transaction requirements — legislatively and administratively. Initially, California’s threshold was $100,000 or 200 transactions, and legislation later changed it to $500,000 with no transaction requirement.[14] New York’s sales threshold was $300,000 and 100 transactions, but it was amended in June 2019 to $500,000, effective retroactively to June 21, 2018.[15] However, the transaction count of 100 remains. In Tennessee, the sales threshold is $500,000 before October 1, 2020, when it will be lowered to $100,000.[16] These changing requirements all affect how and when remote sellers must register and begin collecting and remitting tax.
Once a remote seller exceeds a threshold, applying the appropriate registration or start date is crucial. Requirements range from registering the day the sales threshold is exceeded, as in California, to registering by the first day of the month after the 90th day the retailer made retail sales exceeding the threshold in the current calendar year, as in Colorado.[17] In Texas, registration is required by the first day of the fourth month after the month in which the seller exceeded the safe harbor threshold,[18] and in Pennsylvania, in the following year at the beginning of second quarter on April 1.[19] Registering with a prospective start date raises flags, with states asking for more sales information to properly assess the appropriate registration date.
As a result, remote sellers must know when and how to apply each state’s effective, enforcement, and registration dates. Misinterpreting or failing to keep up with these changes could result in the remote sellers holding the bag for back taxes as well as penalties and interest for failing to collect and remit tax. Remote sellers will either choose to eat the tax or try to collect the back taxes from their customers. Going back to customers and asking for tax is not an easy task, quite possibly resulting in lost customers. It’s also not practical when customers have either moved or closed their businesses. Either way, missing the boat on properly and timely registering to collect and remit tax always results in increased compliance costs for remote sellers.
Marketplace Sales, Sellers, and Facilitators
As states adopted economic nexus rules, many also imposed collection obligations on marketplace facilitators to capture the increasingly popular trend of internet sales through marketplace platforms. Well over 30 states require marketplace facilitators to collect and remit sales tax on behalf of their individual sellers. The states’ definitions of marketplace, marketplace seller, and facilitator vary.
In general, there are broad and narrow definitions. A narrow definition generally requires the facilitator to either directly or indirectly process or collect payment from the customer and transmit payment to the seller. The broad definition usually leads to more uncertainty because a business that may fall within the broad definition may not directly or indirectly process or collect the payment and may not easily comply with the tax collection requirement. Credit card or advertising companies, industries for which these laws were not intended, may end up caught in the wide net cast with the broad definitions, which also potentially impose obligations on more than one party. Under the Multistate Tax Commission classification, 24 states plus the District of Columbia have adopted narrow definitions and 15 states have adopted broad definitions.[20]
Both marketplace sellers and facilitators may have economic nexus if they exceed the sales or transaction thresholds, which are similar to the thresholds for direct remote sellers. Most states include all gross sales made through the marketplace in calculating the threshold for facilitators, while a marketplace seller’s threshold calculation excludes sales made through a facilitator that is already registered and collecting tax in the state.
These numerous and ever-changing rules create significant costs for remote sellers and marketplace facilitators. For in-state businesses, determining whether and when to collect and remit tax may be less costly because there is little or no tracking of sales or transactions based on differing criteria.
Options for Remote Sellers and Marketplace Facilitators
Widespread confusion exists because remote sellers and marketplace facilitators do not understand or are not aware of their new and ever-changing compliance duties. Differing registration requirements, thresholds, rules, rates, and amendments make these policies particularly difficult to track. Ignorance of these requirements, for whatever reason, equates to noncompliance, which can come at a hefty price for back taxes, interest, and penalties. For example, a remote seller with customers in every state with gross sales ranging from $1 million to $10 million a year could be required to collect and remit sales tax of $500 to $1,000 in each of these states; however, compliance could cost this company tens of thousands of dollars in software and infrastructure.
If the business refuses to collect and pay sales tax and rolls the dice to comply only if caught, the cost of doing business skyrockets. Dealing with an audit could mean real money — one month of $800 in uncollected tax extrapolated over a 36-month audit period equates to $28,800 in a potential assessment — not including penalties and interest, which could easily double this figure. Since sales tax is a trust fund tax, the owner, responsible employee, or corporate officer could also be held personally liable for the willful failure to remit tax.
Unregistered businesses are generally better positioned to negotiate settlements and enter into voluntary disclosure agreements than those already registered. Once registered and in the system, options to remediate prior liabilities are limited. In some states, businesses that have registered cannot elect voluntary disclosure for the preregistration period. In this situation, registered businesses that do not know the facts around their sales are likely to owe interest on back payments and have to pay uncollected taxes unless they can remediate payment from those customers or reach an agreement with the state.
As discussed, sales tax collection responsibilities are now more complex than ever for remote sellers and marketplace facilitators, who need dedicated resources and tax advisers to understand and continually monitor these rules and requirements in the states where they have customers or facilitate sales. To properly comply, businesses should expect to spend money on resources such as software and systems, and dedicate personnel or hire tax advisers with multistate tax knowledge to identify, track, and interpret new developments in economic nexus rules and requirements among the states.
[1] South Dakota v. Wayfair Inc., 585 U.S. ___ (2018).
[2] Avalara, State-by-State Guide to Economic Nexus Laws.
[3] Texas comptroller, Remote Sellers; California Department of Tax and Fee Administration, “New Use Tax Collection Requirements for Remote Sellers and New District Use Tax Collection Requirements for All Retailers — Operative April 1, 2019” (Apr. 2019); and New York State Department of Taxation and Finance, Technical Memorandum TSB-M-19(4)S (Nov. 5, 2019).
[4] Alabama Department of Revenue, “ADOR Announces Sales and Use Tax Guidance for Online Sellers” (July 3, 2018).
[5] Arizona DOR, Remote Sales Into Arizona.
[6] Kansas DOR, Notice 19-04 (Aug. 1, 2019).
[7] Kansas Office of the Attorney General, Opinion No. 2019-8.
[8] Alabama DOR, Simplified Sellers Use Tax FAQs; and Pennsylvania DOR, Online Retailers Selling Goods and Services to Pennsylvania Customers.
[9] Illinois DOR, Resource Page for Marketplace Facilitators, Marketplace Sellers, and Remote Sellers.
[10] New York Technical Memorandum TSB-M-19(4)S, supra note 3.
[11] Id.
[12] Texas comptroller, supra note 3.
[13] Louisiana DOR, Remote Sellers Information Bulletin No. 20-002 (May 7, 2020).
[14] Corey L. Rosenthal, “California State and Local Tax Update: Economic Nexus and Marketplace Facilitators,” The CPA Journal, Aug. 2019.
[15] New York Technical Memorandum TSB-M-19(4)S, supra note 3.
[16] Tennessee DOR, Notice #20-14 (July 2020).
[17] Colorado DOR, Out-of-State Businesses.
[18] Tex. Admin. Code Rule section 3.286(b)(2)(B)(i).
[19] Pennsylvania DOR, How Is My Filing Period for Sales Tax Determined?
[20] Multistate Tax Commission, “Wayfair Implementation & Marketplace Facilitator Work Group: July 2020 White Paper” (July 6, 2020).
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