As New York enforces economic nexus, governor seeks internet fairness tax

Update 4.29.2019: The New York Department of Taxation and Finance has published FAQs related to registration requirements for businesses with no physical presence in NYS. Economic nexus is enforced in New York as of June 21, 2018, "the date of the United States Supreme Court decision in Wayfair." It applies to all remote sellers meeting the $300,000 sales and 100 transactions threshold (described below) in the immediately preceding four quarters. Sales made through a marketplace should be included when calculating the threshold. The department recommends remote sellers review their New York sales after the conclusion of each sales tax quarter to determine if the threshold has been met; remote sellers must file a certificate of registration within 30 days after the date the threshold was met and begin to collect tax 20 days after that. The sales threshold was later updated to $500,000, effective June 21, 2018.

Update 4.1.2019: Starting June 1, 2019, New York Senate Bill 1509 imposes a sales tax collection obligation on marketplace providers with more than $300,000 in cumulative total gross receipts of sales made or facilitated in New York in the immediately preceding four quarterly periods. Part of the FY 2020 budget, the bill was delivered to the governor on April 1, 2019. He's expected to sign it. The sales threshold for remote marketplaces was later updated to $500,000, effective June 1, 2019.

An “internet fairness tax” is included in New York Governor Andrew Cuomo’s 2019 Executive Budget proposal. If enacted, it would require marketplace providers (or facilitators) such as Amazon and eBay to collect New York sales tax on behalf of both in-state and out-of-state third-party (marketplace) sellers.

This isn’t the first time New York has attempted to impose a sales tax collection obligation on marketplace providers. A similar provision was included in the 2018 budget proposal, but was removed from the final version.

Under current law, marketplaces and other internet sellers are required to collect tax on their New York sales only if they have a physical presence in the state. Amazon does and therefore taxes New York sales of its own products. But since Amazon isn’t considered the seller for marketplace sales — the marketplace seller is — it only collects on behalf of marketplace sellers that ask it to do so and pay for that service.

If the proposed change is adopted in New York, marketplace providers will be required to collect tax on behalf of all third-party sellers no matter their location. Marketplace sellers won’t be held liable for sales tax if they have an agreement under which the marketplace provider collects and remits New York sales tax on their behalf. However, as with most other state marketplace sales tax laws, if the provider fails to collect the correct amount of tax due to “incorrect information given to the marketplace provider by the marketplace seller,” liability will fall on the seller itself.

A marketplace provider or seller that fails to collect and remit New York sales tax as required by law would have to comply with certain non-collecting seller notice and reporting requirements. This shouldn’t come as a surprise: Amazon has already complied with a “valid and binding legal demand” from New York tax authorities to share certain information about their third-party sellers.

Reporting requirements for non-collecting marketplace providers and seller

A non-collecting provider may have to give the tax commissioner an annual statement regarding each non-collecting seller’s activity in the state, along with each seller’s name, address, and aggregate amount of their New York sales.

A non-collecting seller for whom a marketplace doesn’t collect and remit sales tax may be required to prominently display (on websites, order forms, invoices, etc.) the fact that it doesn’t collect New York sales tax and that purchasers may be required to remit any tax due to the commissioner.

In addition, such non-collecting sellers may have to provide the commissioner with each New York purchaser’s name and last known address, along with the non-collecting seller’s total receipts from purchases of tangible personal property delivered to a location in New York.

Non-collecting sellers may also have to send an annual information return to consumers that includes: a list of the purchaser’s transactions for delivery to a New York location; the date of each purchase; a general description of each item purchased; the amount paid for each item, including shipping or delivery charges; instructions for obtaining additional information on how to remit sales or use tax; and a statement that the seller may be required to annually report the aggregate dollar value of the purchaser’s purchases to the commissioner.

Exception for smaller businesses

The proposed budget measure provides an exception for marketplace providers that facilitate sales “exclusively by means of the internet” and facilitated less than $100 million in sales annually for every calendar year after 2016. It also provides an exception for marketplace sellers with less than $5 million in receipts from all New York purchasers during the prior calendar year.

New York adopts economic nexus

Imposing a tax collection obligation on marketplace facilitators and sellers is just one way the state is seeking to increase its remote sales tax revenue. The budget proposal was revealed shortly after the New York Department of Taxation and Finance announced it was enforcing economic nexus, effective “immediately,” due to the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. (June 21, 2018). The decision overruled the physical presence rule that long prohibited states from taxing remote sales.

According to the department, a remote retailer triggers an obligation to collect New York sales tax once it has more than $300,000 in gross sales of tangible personal property in New York and more than 100 sales of the same in the immediately preceding four sales tax quarters.

Although the Department of Taxation and Finance doesn’t provide an actual effective date for the enforcement of economic nexus, it says, “If you are a business that meets this threshold but has not yet registered as a vendor, you should do so now.” The Wayfair decision was released on June 21, 2018, and the department maintains it gives the state the authority to “immediately” enforce “certain existing provisions” of New York law.

All eyes will be on New York in the coming weeks and months as it clarifies its economic nexus provision and pursues a tax on marketplace sales. In the meantime, if you think you may be at risk for developing a sales tax collection obligation in one or more states, check out Avalara’s state-by-state guide to remote seller sales tax laws.