February 5, 2019 States continue to respond to Wayfair for remote sellers but also focus on collection by marketplace facilitators and opinion's impact on other tax types In the aftermath of South Dakota v. Wayfair (Wayfair),1 in which the U.S. Supreme Court (Court) held that the physical presence nexus standard "is [an] unsound and incorrect" interpretation of its dormant Commerce Clause jurisprudence, over 40 states have adopted economic nexus provisions for remote sellers either through statutory change, administrative regulation or a renewed interpretation of existing law.2 Of those states that have not yet adopted an economic nexus standard for remote sellers, nearly all have proposed economic nexus language that will be considered during the 2019 legislative sessions. In addition to adopting economic nexus provisions for remote retailers, a handful of states also have adopted economic nexus provisions for marketplace facilitators/providers and sellers, with proposed legislative language to be considered by several states this year. Moreover, many states are now looking at Wayfair as a source of authority for extending nexus for other tax types, such as income and gross receipts taxes. A few of these state legislative proposals seem to be following the economic nexus thresholds seemingly endorsed by the Court in Wayfair (i.e., South Dakota's $100,000 of annual in-state sales or entering into 200 in-state transactions) instead of the Multistate State Tax Commission (MTC) model bright-line factor presence nexus standard (i.e., $50,000 of property, $50,000 of payroll, or $500,000 in sales) that a few states had considered or adopted (notably California) for purposes of their business income or gross receipts taxes. In 2018, some members of Congress proposed federal legislation in response to the Wayfair ruling directed at providing some level of uniformity. While those proposals died at the end of the 115th Congress, similar measures are already being introduced in the new 116th Congress. The following is a summary of recent state, local and federal legislative and administrative activity, as well as a summary of some of the more notable state and local proposals being considered, in response to Wayfair. Federal "Protecting Businesses from Burdensome Compliance Cost Act of 2019" (HR 379), sponsored by Rep. Bob Gibbs (R-OH), would prohibit states from requiring remote retailers to collect and remit taxes and fees or collect information incident to the purchase of goods and services if the seller does not have a physical presence in the state, effective for sales made before January 1, 2020. For sales occurring after January 1, 2020, certain conditions would apply for the state to be able to require remote sellers to collect and remit tax, including that the tax or fee is payable at a uniform rate that does not exceed the combined rate of the state and local taxes and fees payable by the purchaser from sellers physically present in the state, and that the state law does not require a remote seller to remit to more than a single location or provide information about the purchaser other than the zip code areas in which such purchasers were located in the state at the time of purchase and the aggregate amount of such taxes and fees collected by the seller in a particular zip code. Further, HR 379 would prohibit subdivisions of the state from requiring remote sellers to collect and remit taxes or fees owed by a purchaser or collect information incident to the purchase. "Stop Taxing Our Potential Act of 2019" (STOP) (S. 128) sponsored by Sen. Jon Tester (D-MT) would prohibit a state from imposing sales, use or similar tax collection and reporting obligations or from assessing such taxes on a person or treating a person as doing business in the state for purposes of collecting such tax, unless that person has a physical presence in the state. The bill sets de minimis physical presence, defines key terms, and includes dispute resolution provisions. If enacted, these provisions would apply to the calendar quarter beginning on or after August 1, 2019. California In response to Wayfair, the California Department of Tax and Fee Administration (CDTFA) announced in two separate notices that, starting April 1, 2019, an economic nexus threshold will be imposed for state and local sales and use tax collection purposes in California. According to the CDTFA notice, as of April 1, 2019, out-of-state retailers must collect use tax. All retailers registered, or those required to be registered, with the CDTFA must collect and pay a district's use tax to the CDTFA, if: (1) the retailer's sales into the state/into the district exceed $100,000 during the preceding or current calendar year; or (2) the retailer made sales into the state/into the district in 200 or more separate transactions during the preceding or current calendar year. The CDTFA bright-line nexus thresholds appear to differ from those announced in other states in that the threshold applies to each individual district as well as the entire state. In other words, it appears that, if a remote seller exceeds the threshold levels of sales for state purposes, it will only have to collect and remit the state portion of the tax and not the local district portion of the tax until its sales to each district exceed either of the designated thresholds in the notice. In making its announcement, the CDTFA made clear that this new collection requirement is not retroactive, but retailers can voluntarily register and collect tax before April 1, 2019.3 Colorado On December 18, 2018, the Colorado Department of Revenue (Department) readopted emergency rules4 that, effective December 1, 2018, require out-of-state retailers to collect sales and use tax for the state and all applicable state-collected localities if the out-of-state retailer has more than $100,000 of gross sales or engages in 200 or more transactions in the previous or current calendar year in the state. The Department is providing in-state and out-of-state retailers with a grace period through May 31, 2019, to implement destination-based sourcing for sales and use tax purposes. Out-of-state retailers that do not collect sales tax during the grace period must still comply with Colorado's reporting statute, which requires non-collecting retailers to provide notices to individual Colorado customers and provide certain information regarding purchases to the Department. During the grace period, the Department will strictly enforce these reporting requirements for non-collecting retailers. Connecticut The Connecticut Department of Revenue Services (Department) issued guidance on the state's new marketplace facilitators and marketplace sellers provisions. Under a 2018 statutory change, marketplace facilitators with sales in Connecticut must register with the Department, starting December 1, 2018.5 District of Columbia Emergency law (B22-1070) expands the District of Columbia's sales and use tax to reach remote retailers by enacting economic nexus and marketplace facilitator/provider provisions. Effective January 1, 2019, remote sellers selling tangible personal property, products transferred electronically, or services for delivery into the District must collect and remit the District's sales and use tax if the seller's gross receipts from such sales delivered into the District exceeds $100,000 or such sales were made in 200 or more separate transactions in 12 months. These provisions will not be applied retroactively. Effective April 1, 2019, a marketplace facilitator must collect and remit sales tax on all sales it makes on its own behalf and all sales it facilitated on behalf of marketplace sellers to customers in the District, regardless of whether the marketplace seller for which sales are facilitated would have been required to collect tax had the sale not been facilitated by the marketplace facilitator. D.C. Laws 2018, Act 22-556 (B22-1070), enacted December 31, 2018; expires March 31, 2019. Legislation (B22-0914) to enact these provisions on a permanent basis has been sent to Congress for a mandatory 30-day in-session review period.6 Iowa Effective January 1, 2019, remote sellers and marketplace facilitators must collect and remit Iowa state and local option sales taxes in the same manner as retailers with a physical presence in the state. A remote seller is defined as one that makes retail sales of tangible personal property, services, or specified digital products into Iowa, but does not have a physical presence in the state. Under legislation enacted in 2018 (SF 2417, enacted at 2018 Iowa Acts, ch. 1161), remote sellers with $100,000 in gross revenue from Iowa sales or 200 separate sales transactions in Iowa in 2018 must collect and remit Iowa state and local option sales tax. A marketplace facilitator is defined to generally include businesses that facilitate retail sales by:
Under SF 2417, if a marketplace facilitator makes or facilitates $100,000 or more in Iowa sales or makes or facilitates Iowa sales in 200 or more separate transactions during 2018, the marketplace facilitator must collect and remit Iowa sales tax and applicable local option sales tax on all taxable sales made through its marketplace. If a remote seller only makes retail sales in Iowa through a marketplace, and the marketplace facilitator collects Iowa sales tax and applicable local option sales tax, the remote seller does not need to obtain an Iowa sales tax permit or file Iowa sales tax returns. Iowa sales tax will be reported and paid on a sales tax return filed by the marketplace facilitator. For additional information on this development, see Tax Alert 2019-0127. Louisiana The Louisiana Department of Revenue (Department) updated its information bulletin for remote sellers to provide a general definition of remote seller, including examples. The bulletin also provides additional administrative guidance on a remote seller's reporting requirements, collection and remittance requirements, and timeline of registration. The Department indicated that the Louisiana Legislature will consider proposals that would define marketplace facilitators and provide for collection and remittance requirements for marketplace facilitators.7 New York On January 15, 2019, the New York Department of Taxation and Finance (Department) issued a notice (N-19-1) announcing that any remote seller meeting the sales threshold set forth in N.Y. Tax Law Section 1101(b)(8)(iv) should immediately register as a vendor and begin charging and collecting tax. The $300,000 threshold in New York-sourced gross receipts from the sale of tangible personal property and 100 transactions involving sales of tangible personal property to New York residents measures sales activity during the immediately preceding four quarters (March 1 through May 31; June 1 through August 31; September 1 through November 30; and December 1 through February 28/29). The threshold amounts were enacted in 1989 as part of New York's anti-Bellas Hess law, the enforcement of which was suspended in light of the U.S. Supreme Court's ruling in Quill v. North Dakota in 1992. For more on this development, see Tax Alert 2019-0177. It is our understanding, based on an informal conversation with the Department, that it will not enforce sales tax collection for prior periods if a remote seller registers based on the guidance date of January 15, 2019; however, failure to do so could result in the Department issuing an assessment going back to June 21, 2018. Pennsylvania The Pennsylvania Department of Revenue (Department) issued Sales and Use Tax Bulletin 2019-01 (revised January 11, 2019), to "clarify when marketplace and remote sellers, marketplace facilitators, and all other vendors maintain a place of business in the Commonwealth." The Department announced that, effective July 1, 2019, the state's economic nexus provisions will apply only to those persons who, in the previous 12 months, made more than $100,000 of gross sales into the Commonwealth. Notably, and unlike other states, Pennsylvania has not announced an alternative transactional number threshold as many other states have. In addition, marketplace facilitators with no physical presence in Pennsylvania must include both facilitated and direct sales in determining whether they have exceeded the economic nexus threshold. Marketplace sellers that lack any physical presence in Pennsylvania must include both their direct sales and those sales made through a marketplace facilitator that does not collect sales tax on its behalf in determining whether they have exceeded the economic nexus threshold. Marketplace facilitators that establish economic nexus in Pennsylvania will be required to collect the sales tax on all sales into the Commonwealth, even if the sale is on behalf of a marketplace seller that does not individually have nexus. For additional information on this development, see Tax Alert 2019-0148. Ohio The American Catalog Mailers Association voluntarily dismissed its complaint challenging the validity, enforceability, and constitutionality of Ohio's cookie and network nexus provisions enacted in 2017. Starting in 2018, these new provisions require certain remote retailers to collect and remit state sales tax. South Dakota Under legislation passed during a special session held in September 2018, the state set a November 1, 2018 collection date for remote retailers not part of the litigation challenging the constitutionality of South Dakota's economic nexus statute Texas The Texas Comptroller of Public Accounts in response to the ruling in Wayfair amended 34 Tex. Admin. Code Section 3.286, to adopt an economic nexus provision for sales and use tax purposes. Beginning October 1, 2019, remote sellers will be required to obtain a permit and collect and remit sales and use tax when their total Texas revenue exceeds $500,000 in the previous 12 calendar months. Effective January 1, 2019, the definition of "engaged in business" is expanded to include remote sellers engaged in regular or systematic solicitation of sales of taxable items in Texas by the distribution of catalogs, periodicals, advertising flyers, or other advertising, through communication systems for the purpose of effecting sales of taxable items, as well as sellers soliciting orders for taxable items by mail or through other media including the internet or media that may be developed in the future. The initial 12 calendar months used to determine a remote seller's total Texas revenue is the period from July 1, 2018 through June 30, 2019. Remote sellers that exceed the safe harbor threshold must start collecting and remitting tax by the first day of the fourth month after the month in which the remote seller exceeded the threshold. Wisconsin Legislation (SB 883) enacted in December 2018, amends Wisconsin's sales and use tax provisions to codify economic nexus provisions that were previously adopted by regulation. Under the revised statutory provisions, the term "retailer engaged in business in the state" includes retailers that, in the previous or current year, either have annual gross sales into Wisconsin that exceed $100,000 or 200 or more of annual separate sales transactions into Wisconsin. Out-of-state retailers that exceed these thresholds in the previous year must register with the Wisconsin Department of Revenue and collect sales and use tax on sales sourced to Wisconsin for the entire current year. In determining whether the thresholds have been met, the following conditions apply: (1) both taxable and nontaxable sales are included; (2) each required periodic lease or license payment is treated as a separate sales transaction; (3) deposits made in advance of sales are not sales transactions; and (4) annual amounts include all sales into Wisconsin by the retailer on behalf of other persons, and all sales into Wisconsin by another person on the retailer's behalf. Wisconsin's economic nexus collection and remittance requirement began October 1, 2018. Wyoming The Wyoming Department of Revenue announced that, effective February 1, 2019, remote retailers and on-line sellers that meet the state's sales and use tax economic nexus threshold will be required to collect tax. The economic nexus threshold will be met if, in the current, or immediately preceding, calendar year: (1) gross revenue from sales into Wyoming exceeds $100,000 or (2) the business has made 200 or more separate transactions for delivery into Wyoming. Information on previously reported state activity is available in Tax Alerts 2018-1468, 2018-1623, and 2018-2108. State and local proposals As mentioned previously, most of the states that have not yet adopted economic nexus provisions for remote retailers have introduced proposals (in some states multiple bills have been introduced) to be considered during the 2019 legislative sessions. In addition, proposed legislation has been introduced in several states that, if enacted, would establish economic nexus provisions for marketplace facilitators. States in which such proposed economic nexus legislation has been introduced (or is being introduced) include the following:
Arizona, Florida, Idaho and Kansas are states that have a sales and use tax but economic nexus legislation has not yet been introduced or adopted. The Kansas legislature, however, considered an economic nexus bill in 2018. Local jurisdictions in Alaska (the state does not impose a sales and use tax) also are considering the impact of Wayfair, and some of the jurisdictions may adopt economic nexus rules. Non-sales and use tax developments The ruling in Wayfair is beginning to affect taxes other than sales and use tax. The website for the Texas Comptroller of Public Accounts, for example, stated, "For franchise tax [purposes], the Comptroller's office is in the process of amending rules to incorporate the decision in Wayfair for franchise tax returns due on or after Jan[uary] 1, 2020."8 The Comptroller said that it will consider the impact of the Wayfair ruling on other taxes (such as the hotel occupancy tax) in the future. Legislation recently introduced in Hawaii (SB 495) would adopt an economic nexus standard for income tax purposes, setting a threshold comparable to that considered in Wayfair (i.e., if a business engages in or solicits 200 or more business transactions with persons in Hawaii and the person's gross income attributable to Hawaiian sources is $100,000 or more, it would be subject to Hawaii business taxes). In addition, a bill was introduced in the Oregon legislature that would establish an economic nexus standard of over $100,000 sales for corporate excise and corporate income tax purposes. Apart from income tax, a proposed bill in Washington would replace bright-line factor presence nexus standard ($53,000 in property or payroll or $267,000 in receipts) under the current Business and Occupation tax with a cumulative gross receipts threshold of more than $100,000 from this state or a physical presence that "need only be demonstrably more than a slightest presence." The impact of Wayfair is not just being considered on the state level. Cities, which impose their own taxes on business income, are also modifying their "doing business" provisions to incorporate an economic nexus standard. Philadelphia recently updated its "doing business" regulation for purposes of its Business Income and Receipts Tax (BIRT) (BIRT Reg. Section 103) to include an economic nexus provision. Effective January 1, 2019, a business with no physical presence in the city will be deemed to have nexus with the city and be subject to the BIRT if it has generated at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year and has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution. In addition, in November 2018, voters in San Francisco approved Proposition D, which establishes economic nexus for all San Francisco business tax purposes, subjecting all businesses with more than $500,000 in total San Francisco-sourced gross receipts to the city's business taxes, regardless of whether they have any kind of physical presence in the city. Implications With most states having adopting (or indicating that they plan to adopt) economic nexus standards for remote sellers, the new focus turns to nexus expansion in other areas. From a sales and use tax perspective, the new wave of nexus expansion legislation seems focused on imposing collection responsibilities on marketplace facilitators. For taxes other than sales and use taxes, states may look to Wayfair as an "approved" "safe harbor" threshold and adopt similar thresholds for income and alternative business tax purposes (either by adopting new provisions or reducing existing current bright-line factor presence standards to the purported lower, Wayfair "safe harbor" standards). In addition, remote sellers that are not yet collecting and remitting sales tax in every state should be monitoring these rapidly evolving developments in every state in which they are selling taxable goods or services. Moreover, as more states begin to enforce their own economic sales tax nexus standards, early adopting states are becoming less amenable to negotiating settlements. Thus, affected remote sellers that are not yet collecting should recognize the increased urgency around addressing economic nexus risk both in terms of systems and process readiness and in executing a thoughtful registration and compliance plan. ———————————————
——————————————— ENDNOTES 1South Dakota v. Wayfair, Inc., Dkt. No. 17-494 (U.S. S. Ct. June 21, 2018). 2States that have already adopted an economic nexus provisions for sales and use tax purposes include: Alabama, California, Colorado, Connecticut, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee (regulation stayed pending outcome of legal challenge and/or legislative activity), Texas, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. 3 Cal. Dept. of Tax and Fee Admin., Special Notice: New District Use Tax Collection Requirements for All Retailers Effective April 1, 2019 (Dec. 2018); Special Notice: New Use Tax Collection Requirements for Out-of-State Retailers Based on Sales into California Effective April 1, 2019 (Dec. 2018). 4 Colo. Dept. of Rev., Emergency Rules 39-26-102(1.3), 39-26-102.3, 39-26-102(9), 39-26-103.5, 39-26-104(1)(b)(I), 39-26-105, 39-26-105(1)(A), 39-26-204(2), and 39-26-704(2) . 5 Conn. Dept. of Rev. Services, OCG-8 "Guidance Regarding Marketplace Facilitators and Marketplace Sellers"(November 16, 2018). 6 See also D.C. Off. Tax and Rev., OTR Notice 2019-02 (January 2, 2019). 7 La. Dept. of Rev., Remote Sellers Information Bulletin No. 18-002 (revised December 18, 2018). 8 Tex. Comp. of Pub. Accts., Texas Tax Responsibilities and Resources for Sellers after Wayfair — Frequently Asked Questions — What about other tax responsibilities for remote sellers? (available on the internet at https://comptroller.texas.gov/taxes/sales/remote-sellers.php (last accessed Jan. 20, 2019)). | |||||||||||||||||||||||||||||||||