Rhode Island responds to Wayfair decision

The Rhode Island Department of Revenue Division of Taxation has published FAQs to help remote sellers understand the impact of the “Wayfair decision” on their Rhode Island tax reporting obligation. But before diving into these, it helps to understand the backstory.

Snapshot: South Dakota v. Wayfair, Inc. 

The “Wayfair decision” refers to South Dakota v. Wayfair, Inc., the opinion in which the Supreme Court of the United States overruled the long-standing rule that a business must have a physical presence in a state for the state to tax its sales.

In its opinion on the Wayfair case, the court determined a business’s economic activity can trigger a tax reporting obligation in a state (economic nexus) — no physical presence is required.

Yet this doesn’t necessarily give all states carte blanche to tax all remote sellers. The Supreme Court highlighted the fact that South Dakota’s tax system “includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.” These are:

• It applies a safe harbor to those who transact only limited business in the state.
• It ensures no obligation to remit the sales tax may be applied retroactively.
• South Dakota is a member of the Streamlined Sales and Use Tax Agreement (SST), which standardizes taxes to reduce administrative and compliance costs.

Safe harbor. South Dakota’s economic nexus law applies to remote businesses with a certain level of economic activity in the state: Gross revenue of more than $100,000 from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota; or 200 or more separate transactions of tangible personal property, any product transferred electronically, or services delivered into South Dakota.

No retroactive reporting. Although granted authority to enforce its economic nexus law by the Supreme Court, South Dakota hasn’t yet determined when the law will take effect. The case was remanded to state court for further proceedings not inconsistent with the Supreme Court ruling. However, according to the law, the state cannot require remote sellers to remit tax on past transactions.

SST. 23 states, including South Dakota, are full members of the SST, meaning they’ve taken steps to “substantially reduce the burden of tax compliance.” Tennessee is an associate member.  

South Dakota SB 106 stressed that the inability to tax remote sales was “causing revenue losses and imminent harm to this state.” It further stated there was an “urgent need for the Supreme Court of the United States to reconsider [the physical presence] doctrine.” Its law was designed to trigger such a review.

Rhode Island took a different approach.

Rhode Island

Rhode Island’s H 5175 makes no mention of the Supreme Court or its physical presence rule. Instead, it acknowledges that “the commerce clause of the United States Constitution prohibits states from imposing an undue burden on interstate commerce” and states: “it is no longer an undue burden for non-collecting retailer to accurately compute, collect and remit and/or report” Rhode Island sales and use tax because: 

• Sales and use tax collection software is readily available
• Rhode Island is a member of the Streamlined Sales and Use Tax Agreement, which has created a “compliance infrastructure … to facilitate the collection and remittance of sales tax”
• Remote vendors establish a physical presence in Rhode Island by placing software (e.g., web cookies) on the devices of in-state customers

Read more about Rhode Island’s law here. (Note that it refers to a remote retailer/seller as a non-collecting retailer.)

Important FAQs for remote retailers

Like South Dakota, Rhode Island’s law provides an exception for small sellers. A remote retailer won’t be liable for tax unless it has:

• Gross revenue from the sale of tangible personal property, prewritten computer software delivered electronically or by load and leave, and/or taxable services delivered into Rhode Island equal to or exceeding $100,000; or
• 200 or more separate sales transactions of tangible personal property, prewritten computer software delivered electronically or by load and leave, and/or taxable services for delivery into Rhode Island

Unlike South Dakota, Rhode Island allows remote retailers meeting the threshold to opt out of reporting by complying with certain use tax notice and reporting requirements for non-collecting sellers.

Also unlike South Dakota, Rhode Island may apply its law retroactively. The Division of Taxation says the law took effect August 17, 2017, and: “It is possible that non-collecting retailers could be liable for tax on Rhode Island sales that were made prior to the Wayfair decision on June 21, 2018.” The non-collecting retailers are invited to “review Rhode Island General Laws §§ 44-18.2-2 and 44-18.2-3 to determine whether these sections apply to you.”

See all the FAQs here.

What happens next?

Many states had broadened the definition of nexus beyond physical presence prior to June 21, 2018, when the Supreme Court issued its opinion on South Dakota v. Wayfair, Inc. Some adopted economic nexus laws quite similar to South Dakota’s. Others, like Rhode Island, created a variation.

It will take time for the full effects of the decision to trickle down to all the states, and future court battles can’t be ruled out. To minimize these, the National Conference of State Legislatures (NCSL) recommends states wait until January 1, 2019 before requiring remote sellers to register and report: “States should first review their sales tax statutes in light of the Court’s holding to determine whether the State has the statutory basis to require remote sellers to collect tax.”

Clearly, Rhode Island has opted to blaze its own path. While it’s an SST state and provides a small seller exception, it’s seeking to apply its rule retroactively. This is very much at odds with the Wayfair ruling.

Furthermore, Rhode Island is not heeding the NCSL’s advice to “not seek to collect taxes for prior periods.” Exactly how this will affect the state’s ability to enforce its law remains to be seen.

In the meantime, learn more about South Dakota v. Wayfair, Inc. and its possible impact on your business here.