Most States Now Require Remote Sellers to Collect Sales Tax

SEMA News—August 2019

LEGISLATIVE AND TECHNICAL AFFAIRS

Most States Now Require Remote Sellers to Collect Sales Tax

By Stuart Gosswein

  TaxCompanies should assume that economic nexus is here to stay following last year’s South Dakota vs. Wayfair Supreme Court decision and plan accordingly. Nevertheless, for many small- and medium-size companies, there may be no sales tax exposure given current state tax thresholds.
   

Companies without any physical presence in a state can now be required to collect sales tax based on their sales volume. In June 2018, the U.S. Supreme Court ruled in favor of a South Dakota state law requiring remote sellers to collect sales tax. (The term “remote” applies to internet, catalog and telephone sales, along with other types of transactions.) The court overturned the 1992 Quill decision, which required a physical presence to create “substantial nexus,” thereby allowing state sales tax collections.

A company can now have “economic nexus” in a state without otherwise having a physical presence. While granting South Dakota the right to require tax collections based on the volume of sales into the state, the court did not specifically rule on what amount of sales triggers an economic presence. Rather, it sent the South Dakota vs. Wayfair case back to a lower court to address the issue of whether the state law placed an undue burden on interstate commerce. The parties (Wayfair, Overstock and Newegg) then settled out of court in October 2018.

While the question of “undue burden” is technically unsettled, the Supreme Court ruling provided guidance when it deemed the South Dakota law as setting a sensible small-business safe harbor. The South Dakota law established a small-business exemption for retailers with less than $100,000 or 200 transactions in annual sales.

The court noted that the law provided small-business sellers with a reasonable exemption and prohibited retroactive collection. The court also observed that South Dakota is part of the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA is intended to address tax collection burdens by creating a single, state-level tax administration, simplified tax rates and tax returns, uniform definitions, a central electronic registration system for all member states, and the availability of free tax administration software. (There are currently 23 participating SSUTA states in addition to Washington, D.C. For more information, visit
www.streamlinedsalestax.org.)

Economic nexus for remote sellers is based on sales revenue or the number of transactions or both. Companies should assume that economic nexus is here to stay following last year’s Supreme Court decision and plan accordingly. The court decision has made it less likely that the U.S. Congress will address the issue through federal legislation.

States have been eager to collect sales tax revenues for years and have been quick to enact laws and update regulations following the court ruling. Since the court indicated that the thresholds set under the South Dakota law seemed reasonable ($100,000 or 200 transactions), many states have adopted the same thresholds or are setting higher levels.

How Should Companies Respond to the New
Developments Governing State Sales Tax?

First, does your company exceed the threshold for remote sales tax nexus? For most states, the threshold is relatively high: $100,000 or 200 transactions in annual sales. For many small and medium-size companies, there may be no exposure.

If your company does meet a state’s economic nexus threshold, should a company immediately register, collect and remit the taxes? Not necessarily.

For all companies, this is a time to step back and review all potential liabilities. For example, is there a chance that your company already had physical nexus and should have been collecting sales taxes due to the presence of a sales representative, a distribution or storage facility, or participation in a trade show? Some states also have economic franchise and other tax obligations. It is important to review the status of a company’s presence in a state before registering to collect sales tax.

Returning to the economic nexus threshold issue for remote sales, states may vary in how they are calculated. Revenues may be based on gross sales, retail sales or taxable sales. The number of transactions may encompass one agreement, multiple invoices, or monthly subscriptions. Each state will define when a taxable year has commenced when calculating whether the company is below or above the economic threshold. If a company is close to the exemption threshold for a specific state,
it should then review how the state calculates nexus.

All states have a formal or informal voluntary disclosure agreement (VDA) process for addressing tax liabilities. If a company determines that a tax exposure already exists but has not been paid, the company should take advantage of the VDA process since it limits the lookback period of tax liabilities (usually to three years), removes most if not all penalties, and sometimes reduces or eliminates interest. Caution: The VDA process is not always available once you have registered to collect sales tax, so there is an incentive for conducting a comprehensive tax-risk assessment before registering.

SEMA recommends that companies consult their accountant or tax professional regarding the issues raised.

The chart above shows the current out-of-state sales tax collection requirements, as of May 1, 2019 but please note that these requirements and still changing.

Current Out-of-State Sales Tax Collection Requirements, as of May 1, 2019:

State     Sales tax collection start date     Exemption for Minimum Sales
Alabama     October 1, 2018      $250,000 
Alaska     No Sales Tax      
Arizona     Proposed     $100,000 or 200 transactions
Arkansas      July 1, 2019     $100,000 or 200 transactions 
California     April 1, 2019     $500,000
Colorado     May 31, 2019     $100,000 or 200 transactions
Connecticut      December 1, 2018      $250,000 or 200 transactions
Delaware     No Sales Tax      
District of Columbia     January 1, 2019     $100,000 or 200 transactions
Florida     Proposed     $100,000 or 200 transactions
Georgia     January 1, 2019     $250,000 or 200 transactions
Hawaii      July 1, 2018       $100,000 or 200 transactions
Idaho      June 1, 2019     $100,000 
Illinois      October 1, 2018     $100,000 or 200 transactions 
Indiana      October 1, 2018      $100,000 or 200 transactions 
Iowa      January 1, 2019       $100,000 
Kansas     Proposed     $100,000
Kentucky     October 1, 2018      $100,000 or 200 transactions 
Louisiana     Enforcement date TBD     $100,000 or 200 transactions 
Maine     July 1, 2018      $100,000 or 200 transactions 
Maryland     October 1, 2018       $100,000 or 200 transactions 
Massachusetts     October 1, 2017     $500,000 or 100 transactions 
Michigan       October 1, 2018      $100,000 or 200 transactions 
Minnesota      October 1, 2018      10 transactions totaling $100,000 or 100 retail transactions (rising to 200 transactions on October 1, 2019)
Mississippi     September 1, 2018     $250,000 
Missouri     Proposed     $100,000 or 200 transactions
Montana     No Sales Tax      
Nebraska      January 1, 2019       $100,000 or 200 transactions
Nevada       November 1, 2018      $100,000 or 200 transactions 
New Hampshire     No Sales Tax      
New Jersey     November 1, 2018      $100,000 or 200 transactions 
New Mexico     July 1, 2019      $100,000
New York     January 15, 2019     $300,000 or 200 transactions 
North Carolina     November 1, 2018      $100,000 or 200 transactions 
North Dakota     October 1, 2018      $100,000 or 200 transactions 
Ohio         January 1, 2018     $500,000
Oklahoma       November 1, 2019     $100,000 
Oregon     No Sales Tax      
Pennsylvania      April 1, 2018       $100,000 
Rhode Island     August 17, 2017     $100,000 or 200 transactions 
South Carolina     November 1, 2018      $100,000 
South Dakota      November 1, 2018     $100,000 or 200 transactions 
Tennessee     Proposed     $500,000 
Texas      January 1, 2019      $500,000 
Utah       January 1, 2019      $100,000 or 200 transactions 
Vermont       July 1, 2018      $100,000 or 200 transactions 
Virginia     July 1, 2019     $100,000 or 200 transactions 
Washington     October 1, 2018     $100,000 or 200 transactions
West Virginia      January 1, 2019     $100,000 or 200 transactions 
Wisconsin     October 1, 2018       $100,000 or 200 transactions 
Wyoming     February 1, 2019     $100,000 or 200 transactions
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