Allison D. Rule, Partner and Communications Taxes & Fees Practice lead at Marashlian & Donahue, PLLC, The CommLaw Group
Jacqueline R. Neff, Senior Managing Attorney
Seth L. Williams, Associate Attorney
With Wayfair, the Supreme Court did the easy part, paving the way for states to impose sales tax collection requirements on remote online sellers. Now states and, more importantly, businesses are left with the hard part, figuring out exactly how to collect sales taxes from remote sellers in different jurisdictions across the country.
To date, more than twenty states have already passed economic nexus laws that are either already in effect or will take effect soon, generally by January 1, 2019. A number of these states have adopted laws that mirror the South Dakota law at issue in Wayfair. For example, Hawaii, Iowa, Illinois, and Indiana all have economic nexus laws with an economic nexus threshold of $100,000 in sales or 200 transactions in the state. However, there are a number of outlier states with economic nexus thresholds and rules that differ significantly from those upheld by the Court in Wayfair. The lack of uniformity among the states may lead to confusion and frustration for sellers that are attempting to develop a nationwide (or multistate) sales tax strategy.
For example, several states have implemented laws with larger thresholds before a seller triggers economic nexus in the state. Alabama and Mississippi opted to set their thresholds for economic nexus at $250,000 in annual sales in their states; Connecticut requires $250,000 in annual sales and 200 or more transactions in the state; and Tennessee only imposes economic nexus on sellers with more than $500,000 in sales in the state during the previous 12-month period. In contrast, and potentially more problematic for sellers, other states have enacted economic nexus laws with extremely low thresholds that could potentially be triggered by a single large purchase order in a state. Specifically, Minnesota and Pennsylvania stand out for their low economic nexus thresholds. In both states, a seller with more than $10,000 in sales during the prior year can be subject to sales tax collection and remittance requirements.
In Minnesota, the impact of the low economic nexus threshold is somewhat mitigated by a state law caveat that a remote seller only has nexus with the state if it makes sales through an Internet marketplace provider or through any other third party maintaining a place of business in Minnesota. As a result, Minnesota’s system may be more accurately viewed as a hybrid economic/affiliate nexus structure. While this hybrid nexus structure may allow some businesses to avoid sales tax liability in Minnesota, it adds yet another factor retailers must take into account when structuring their tax compliance strategies.
Similarly, Pennsylvania has somewhat diluted the impact of its lower economic nexus threshold by allowing sellers to either collect and remit sales taxes or comply with the state’s “notice and reporting” requirements. Approximately a dozen states have adopted notice and reporting requirements as an alternative for remote sellers that opt not to register with the state and remit sales taxes. With respect to Pennsylvania, the Commonwealth requires any seller that selects the notice and reporting option to:
- Post a notice on its sales forums informing customers that sales or use tax may be due on purchases;
- Provide a written notice on all invoices, order forms, sales receipts, or similar documents (whether in paper or electronic form) notifying the purchaser of the potential sales tax liability in Pennsylvania;
- Provide an annual report to the purchaser by January 31 of each year notifying the purchaser that Pennsylvania sales or use tax may be due on purchases from the prior year; and
- Send an annual report to the Pennsylvania Department of Revenue by January 31 of each year that provides the Department with each purchaser’s name, billing address, delivery address, last known mailing address (if different), and the total dollar amount of purchases from the remote seller.
These onerous notice and reporting requirements may push remote sellers to simply register and remit sales tax. Other states, including Oklahoma and Rhode Island, also allow remote sellers to choose between remitting sales taxes directly to the state or complying with that state’s notice and reporting requirements. Colorado also imposes notice and reporting requirements on remote sellers, but Colorado does not currently have a corresponding economic nexus law under which remote sellers would be required to remit sales taxes to the state.
Finally, at least one state is phasing in economic nexus requirements for remote sellers on different time frames based on the type of good or service provided by the seller. For most transactions, Washington’s economic nexus law took effect on January 1, 2018. However, for the sale of certain digital products and digital codes, sellers are not subject to Washington’s remote seller law until January 1, 2020.
This article does not attempt to give an exhaustive description of the differences between various state economic nexus laws because these laws will continue to evolve as more states adopt economic nexus rules and legal challenges regarding various flavors of economic nexus laws make their way through the courts. In particular, the implementation of a number of state economic nexus requirements were contingent upon the impact of the Wayfair decision. And, while the Supreme Court upheld South Dakota’s economic nexus structure, it remanded the case back to the South Dakota Supreme Court to determine whether the state’s statute could be challenged on other grounds. While Vermont has elected to begin enforcement of its economic nexus statutes despite the Supreme Court’s remand, it remains unclear whether other states will follow suit or whether they will wait until the remand works its way through the courts to begin enforcement of their own economic nexus requirements.
We expect a number of states to issue further guidance as to their existing economic nexus policies and laws in the coming weeks, as each state carefully reviews and considers the impact of the Wayfair decision on its own nexus requirements. Further, as will be discussed in the next installment of this series, there are other states that had no economic nexus requirements in place prior to the decision in Wayfair that are now rushing to create and enforce new economic nexus regimes. And, there is a growing push for Congress to address the impact of the Court’s Wayfair ruling through federal legislation. Regardless, the variety of economic nexus laws already on the books underscores the importance of seeking qualified accounting and legal advice before a company begins remote sales in a new jurisdiction.
Part III of this series will be released on August 1, 2018.
If you have any questions about how economic nexus laws may impact your business’s online or other remote sales, please contact Allison Rule at email@example.com, Jackie Neff at firstname.lastname@example.org, or Seth Williams at email@example.com.