New year brings new reporting requirements for remote retailers in Ohio

Beginning Jan. 1, 2018, out-of-state sellers that place applications (apps) and other software on in-state devices are required to collect and remit Ohio sales and use tax.

This new tax policy challenges the physical presence precedent upheld by Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Under that seminal Supreme Court decision, states cannot require remote retailers to collect and remit tax unless they have a substantial connection to — i.e., physical presence in — the state.

With the enactment of House Bill 49, apps and other software placed on the computers, laptops, and handheld devices of Ohio customers give remote retailers the physical presence required for the state to tax them. Starting Jan. 1, 2018, remote sellers with in-state software nexus and/or network nexus have an obligation to collect and remit Ohio sales and use tax.

A seller that uses in-state software to sell or lease taxable tangible personal property or services to consumers in Ohio has “in-state software nexus” and must collect and remit Ohio sales and use tax, “provided the seller has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state.”

The Ohio Department of Taxation provides the following example to illustrate its new law: A remote clothing retailer with annual gross receipts of $2 million in Ohio has a presence in Ohio and an obligation to collect tax because it “provides for the sale of the clothing through a catalog application which is downloaded onto the customer’s computer or cell phone. The catalog application is software, as is the html and java script coding used in displaying the seller’s website on the customer’s computer or cell phone. It is the presence of this software … that is significantly associated with [the seller’s] ability to establish and maintain its market and that meets the physical presence standard set forth in Quill.”

Network nexus is created when sellers provide or enter into an agreement with another person to provide a content distribution network in Ohio “to accelerate or enhance the delivery of the seller’s website to consumers.” As with the new in-state software nexus provision, the seller must have annual gross receipts in Ohio in excess of $500,000.

The Ohio Department of Taxation provides the following example to illustrate the new policy: An out-of-state seller of security services enters into a contract with a provider of interconnected services that accelerates the delivery of the seller’s website to consumers. The provider has three servers in Ohio that it utilizes to provide security and enhance delivery of these web-based services in Ohio and surrounding states. The out-of-state seller of security services made $800,000 in sales of taxable services in Ohio in 2017, and is presumed to have nexus and an obligation to collect and remit Ohio tax as of Jan. 1, 2018.

Ohio isn’t the first state to tax a remote business based on its web cookies. A similar policy took effect in Massachusetts on Oct. 1, 2017. The Bay State challenges the physical presence standard by stating that internet vendors differ from catalog-only vendors because they:

• Store apps and cookies on the in-state devices of their customers
• Have contracts or other relationships with content distribution networks that result in the use of in-state servers or hardware
• Have contracts or relationships with online marketplace facilitators and or delivery companies that result in in-state services

The Massachusetts regulation is being challenged by a Virginia-based internet seller; the case, Crutchfield Corp. v. Harding, Va. Cir. Ct., No. CL17001145-00, was filed Oct. 24 in the Albemarle County Circuit Court.

To learn more about Ohio’s new policy, see the Ohio Department of Taxation ST 2017-02 — Sales and Use Tax: Software Nexus and Network Nexus, as well as ST 2001-01 — Use Tax Information Release.

To learn how tax automation software helps businesses of all sizes in all states facilitate sales tax compliance, check out Avalara.

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