United States: Remote Vendors' Sales Tax Obligations After Wayfair

On June 21, 2018, the US Supreme Court issued its decision in South Dakota v. Wayfair, Inc.,1 overruling the Quill physical presence nexus test2 for collection of sales and use taxes by remote vendors. Under the physical presence test, which had a 50-year history, a state could not require a vendor to collect sales and use taxes unless the vendor had some physical presence in the state (such as employees, property or certain representative activities undertaken by a third party on the vendor's behalf). The Wayfair decision holds that a vendor satisfying the sales thresholds specified under South Dakota law (at least $100,000 in annual sales or more than 200 transactions selling property or services to South Dakota customers) has sufficient nexus with the state to be required to collect sales and use taxes.

The Wayfair decision has immediate consequences for vendors who meet the disjunctive sales threshold under South Dakota law: the Court held that a taxpayer exceeding that threshold necessarily "avails itself of the substantial privilege of carrying on business" in the state and therefore has sufficient nexus to be required to collect sales and use taxes.3 Although the Supreme Court technically remanded the case to the South Dakota Supreme Court for consideration of alternative bases for constitutional challenge, it is reasonable to expect that South Dakota will begin enforcing the collection obligation in the foreseeable future.

The decision also has implications for vendors selling into at least 20 states that have already begun, or have positioned themselves to begin, imposing a general collection obligation on remote sellers. A list of these jurisdictions and the applicable sales and transaction thresholds is provided in the Appendix. Vendors who have not been collecting sales and use taxes in these jurisdictions in reliance on Quill will need to reconsider whether to begin collecting and the extent to which uncollected taxes need to be accrued as a financial statement liability. Other states are likely to follow the trend, either via legislation or interpretation of their existing statutes, and vendors will need to be alert for new remote collection obligations, effective dates and applicable thresholds.

Even prior to the legislation that prompted the Wayfair litigation, many states imposed collection responsibilities on a subset of remote vendors based on the activities of a vendor's affiliates ("affiliate nexus") or based on contractual arrangements with third parties that marketed the vendor's products electronically ("click-through nexus"). Vendors that have resisted these collection responsibilities in reliance on Quill will now need to reconsider whether they have a basis not to collect and the extent to which financial statement accruals may be required for uncollected taxes from prior periods. Affiliate nexus states include Alabama, Arkansas, California, Colorado, Connecticut, Georgia, Illinois, Iowa, Kansas, Louisiana, Maine, Michigan, Missouri, Nevada, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia. Click-through nexus states include Arkansas, California, Connecticut, Colorado, Georgia, Idaho, Illinois, Iowa, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Vermont and Washington.

Finally, the Wayfair decision is likely to embolden other state collection efforts, such as efforts to require collection by online marketplace providers that process sales on behalf of vendors who may not individually meet the sales or transaction thresholds to be required to collect as a remote vendor. Alabama, Arizona, Connecticut, Iowa, Minnesota, Oklahoma, Pennsylvania, Rhode Island and Washington currently have laws requiring collection by online marketplaces, and other states may follow suit.

On the federal level, congressional action could conceivably put some guidelines around state collection requirements, such as requiring states to conform to simplified computation rules or shifting the sales tax liability to the vendor rather than customers. Despite multiple proposals over 15-plus years, however, none of the proposed federal legislation had moved very close to passage prior to Wayfair, and it is unclear whether the Court's decision will alter those prospects.

Appendix: Threshold Collection Statutes Potentially Effective Following Wayfair

  • As of January 1, 2016, Alabama has required collection of tax using a simplified system and a flat 8% rate by vendors with more than $250,000 in annual sales of tangible personal property to Alabama customers.4
  • Indiana enacted legislation effective July 1, 2017, requiring collection of tax by remote vendors with more than $100,000 in annual sales or 200 or more annual sales transactions to Indiana customers.5 The Indiana Department of Revenue suspended enforcement of the collection obligation pending the outcome of the Wayfair litigation.6
  • Tennessee promulgated regulations requiring collection by remote vendors with more than $500,000 in annual sales to Tennessee customers that engage in "regular and systematic solicitation" of consumers in Tennessee, effective July 1, 2017.7 The collection requirement was enjoined by a state court before it went into effect,8 and it is unclear whether the Wayfair decision will resolve that litigation.
  • Wyoming enacted legislation effective July 1, 2017, requiring collection by remote vendors with more than $100,000 in annual gross revenue from sales of tangible personal property, admissions, or services, or 200 or more annual sales transactions delivered in Wyoming.9 The collection requirement is suspended by operation of the statute until a declaratory judgment that the law is enforceable, which may soon be forthcoming in light of Wayfair.
  • As of August 17, 2017, Rhode Island began requiring either collection or reporting by vendors with at least $100,000 in annual gross revenue from, or 200 or more sales of, taxable goods or services to Rhode Island customers.10
  • As of October 1, 2017, Maine has required collection by remote vendors with more than $100,000 in annual sales or 200 or more annual sales transactions to Maine customers.11
  • As of October 1, 2017, Massachusetts requires collection by "Internet vendors" with more than $500,000 of annual sales (of tangible personal property or telecommunications services) and 100 or more annual sales transactions involving Massachusetts customers.12
  • As of December 1, 2017, Mississippi has required collection of tax using a simplified system and a flat 8% rate by vendors with more than $250,000 in annual sales to Mississippi customers.13
  • For tax years beginning after December 31, 2017, Hawaii requires collection by all vendors with more than $100,000 in annual Hawaii sales or 200 or more annual Hawaii sales transactions.14
  • As of January 1, 2018, Ohio began requiring collection by vendors with certain online connections in the state if they also have more than $500,000 of sales of tangible personal property or services in Ohio.15
  • As of January 1, 2018, Washington has required either collection or reporting by "remote sellers" with $10,000 or more in annual gross receipts from retail sales sourced to Washington.16
  • As of April 1, 2018, Pennsylvania has required either collection or reporting by vendors with at least $10,000 in annual sales subject to Pennsylvania sales tax.17
  • As of June 21, 2018, North Dakota requires collection by remote vendors with more than $100,000 in annual sales of tangible personal property (or other taxable sales) or 200 or more annual sales transactions delivered in North Dakota.18
  • As of July 1, 2018, Oklahoma will require either collection or reporting by remote sellers with at least $10,000 in annual sales subject to Oklahoma sales tax.19
  • As of July 1, 2018, Kentucky will require collection by remote vendors with more than $100,000 in annual sales or 200 or more annual sales transactions involving sales of tangible personal property or digital products delivered or electronically transferred to a customer in Kentucky.20
  • As of July 1, 2018, Vermont will require collection by remote vendors that regularly, systematically or seasonally solicit sales of tangible personal property in Vermont and that have made sales of tangible property from outside Vermont for delivery in Vermont totaling at least $100,000 or at least 200 separate transactions in any prior 12-month period.21
  • As of October 1, 2018, Illinois will require collection by remote vendors with at least $100,000 in annual sales or 200 or more annual sales transactions for tangible personal property sold to Illinois customers.22
  • As of December 1, 2018, Connecticut will require collection by remote vendors that engage in regular or systematic solicitation of sales of tangible personal property in Connecticut and that have annual gross receipts of $250,000 or more from such sales and 200 or more retail sales from outside Connecticut to Connecticut customers.23
  • As of January 1, 2019, Iowa will require collection by remote vendors with gross revenue from Iowa sales of at least $100,000 per year or 200 or more annual Iowa sales.24
  • As of January 1, 2019, Georgia will require collection by remote vendors with more than $250,000 in annual sales of tangible personal property in Georgia or 200 or more retail sales of tangible personal property in Georgia.25
  • Louisiana recently passed a bill requiring collection by remote vendors with more than $100,000 in annual sales of tangible personal property, electronically delivered property, or services, or 200 or more annual sales transactions delivered in Louisiana. The collection requirements apply to taxable periods beginning on or after the date that the Supreme Court finds the similar South Dakota law constitutional. The Louisiana Secretary of Revenue has noted that the Wayfair case is on remand to the lower court and stated that implementation of the law will be deferred until at least the fall.

Footnotes

  1. 585 U.S. ___, No. 17-494 (June 21, 2018).
  2. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
  3. 585 U.S. ___, slip op. at 22.
  4. Alabama Admin. Code Rule 810-6-2-.90.03.
  5. Ind. Code § 6-2.5-2-1.
  6. Indiana also has a voluntary disclosure program open until December 31, 2018, for remote vendors that maintain inventory in the state but have not been collecting sales and use taxes.
  7. Tenn. Comp. R. & Regs. 1320-05-01-.129(2).
  8. American Catalog Mailers Ass'n v. Department of Rev., Tenn. Ch. Ct., No. 17-307-IV (order dated Apr. 10, 2017).
  9. Wyo. Stat. § 39-15-501.
  10. Rhode Island Gen. Laws § 44-18.2.
  11. Me. Stat. tit. 36, § 1951-B.
  12. 830 Code Mass. Regs. 64H.1.7 (Sept. 22, 2017). Proposed legislation in Massachusetts would authorize the Department of Revenue to establish an amnesty program under which smaller vendors who register by June 30, 2019, would be exempt from tax for periods prior to that date.
  13. Rule 35.IV.3.09, Mississippi Department of Revenue.
  14. Hawaii Rev. Stat. c. 237, as added by 2018 Act 41 (S.B. 2514) (eff. July 1, 2018, and applicable to tax years beginning after Dec. 31, 2017).
  15. Ohio Rev. Code Ann. § 5741.01(I)(2).
  16. 65th Legislature, 2017 3rd Special Session, H.B. 2163.
  17. Act 43 (H.B. 542), Laws 2017.
  18. N.D. Cent. Code § 57-40.2-02.3. The statute was enacted in 2017 with a provision that it would become effective on the date that the Supreme Court overruled Quill.
  19. Okla. Stat., Title 68, § 1392.
  20. Ky. Rev. Stat. § 139.340(2)(g).
  21. Vt. Stat. tit. 32, § 9701(9)(F), effective "on the later of July 1, 2017 or beginning on the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement of Quill."
  22. 35 ILCS 105/2, as amended by Ill. P.A. 100-587, § 80-5.
  23. Conn. Gen. Stat. § 12-407(12)(G), as amended by 2018 S.B. 417.
  24. Iowa Code § 423.14A(2)-(3) (eff. Jan. 1, 2019).
  25. Ga. Code § 48-8-2(8)(M.1)-(M.2), as added by 2018 H.B. 61.

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