Endangered species: state incentives for remote sellers who voluntarily collect sales tax

To encourage out-of-state sellers to voluntarily collect and remit sales tax when they’re not legally required to do so, some states provide incentives such as flat sales tax rates or seller discounts. Now that states are authorized to tax remote sales, those incentives are at risk of joining the dodo and the Tasmanian tiger on the extinct list.

The repeal of the physical presence rule

Until recently, states were prohibited from taxing sales by businesses with no physical presence in the state. Yet on June 21, 2018, the Supreme Court of the United States repealed the physical presence rule in its decision on South Dakota v. Wayfair, Inc. States now have the authority to tax remote sales.

Since states can now require out-of-state sellers with no physical presence in the state to collect and remit sales tax, they no longer need to entice them to do so.

The end of voluntary sales tax collection perks?

Alabama

Before Alabama had the authority to tax remote sales, the Alabama Department of Revenue developed a Simplified Sellers Use Tax (SSUT) program to help simplify sales tax compliance for out-of-state sellers. It’s open only to businesses that make sales of tangible personal property in the state from a location outside Alabama, have no physical presence in the state, and are not otherwise required to collect Alabama sales or use tax.

The SSUT program originally offered participants two perks: Though combined sales and use tax rates in Alabama vary widely (from 4 to 11 percent), SSUT program participants collect a flat 8 percent tax on all sales into the state; and until January 1, 2019, participants were also entitled to keep 2 percent of the tax revenue they collected and remitted.

The flat 8 percent rate is still provided. However, as of January 1, 2019, the 2 percent discount only applies to the first $400,000 of the taxes a remote seller collects and remits.

It’s unlikely remote sellers will stop collecting tax on their Alabama sales: Thanks to the Wayfair decision, Alabama now imposes a sales and use tax collection obligation on remote sellers and marketplace facilitators with more than $250,000 in sales in the state (though marketplace facilitators may opt to comply with non-collecting seller use tax reporting requirements instead).

Utah

Utah has also changed its remote seller rewards program. It used to offer remote businesses a generous 18 percent discount for voluntarily collecting and remitting Utah sales tax. As of January 1, 2019, the seller discount offered to voluntary remote sellers is repealed.

The repeal coincides with the enforcement of Utah’s economic nexus law. As of January 1, 2019, the state requires remote sellers with more than $100,000 in sales or at least 200 separate transactions in the state in the current or previous calendar year to collect and remit sales tax.

Thirty-five states have adopted economic nexus laws requiring remote businesses to collect and remit sales tax if they have a certain amount of economic activity in the state. More are enforcing other remote seller sales tax laws, such as click-through nexus, cookie (or software) nexus, and collection requirements for marketplace facilitators. To learn more about states’ remote sales tax laws, check out Avalara’s South Dakota v. Wayfair, Inc. resource page, which is updated as changes are announced.

What about non-collecting small sellers?

The more states can require out-of-state businesses to comply with their sales tax laws, the less they have to reward them for doing so.

However, remote seller sales tax laws typically allow an exception for small sellers; Utah’s threshold is $100,000 in sales or 200 transactions, while Alabama’s is $250,000 in sales. Are states doing anything to encourage businesses that are under the threshold to collect and remit?

Some are. For example, both Oklahoma and Pennsylvania require any remote seller with at least $10,000 in sales in the state to either collect and remit sales tax or comply with use tax notice and reporting requirements for non-collecting sellers. More than a dozen states rely on non-collecting seller use tax notice and reporting to help track down individuals and businesses that owe use tax to the state, and encourage businesses to voluntarily collect and remit sales tax, which could be less burdensome.

States could also incentivize voluntary collection, like Utah used to do and Alabama still does (though to a lesser degree). More than 25 states already offer registered businesses a timely filing discount by allowing them to keep a portion of the sales tax they collect. It’s a reverse incentive, in that it allows them to keep a portion of the sales tax they collect unless they fail to file and remit by the due date. Texas provides an additional discount for businesses that file early.

The Streamlined Sales and Use Tax Project

Because sales tax laws vary from state to state, sales tax compliance is often challenging for businesses that collect in multiple states. To address this complexity, the National Governors Association and the National Conference of State Legislatures created the Streamlined Sales and Use Tax Project (or SST) in 1999. Its purpose: to simplify and reduce the costs associated with sales tax collection and remittance. There are currently 23 full member states and one associate member state.

SST states have partnered with certified sales tax compliance software providers (CSPs), like Avalara, to certify the accuracy of their software. As an added benefit, SST states help defray the costs of using a CSP for some retailers. In addition, SST states encourage voluntary compliance by paying the costs associated with automating sales tax compliance for any business that’s a “volunteer seller (i.e., generally does not have physical presence) in the member state.” As more states establish remote sales tax laws, this perk may be especially helpful to the small businesses that often qualify for an exception.

To date, only one state that isn’t a member of SST is encouraging remote sellers to use a CSP: Pennsylvania. The Pennsylvania Department of Revenue plans to certify sales tax compliance service providers that will be able to assist businesses with the registration, collection, reporting, and remittance of sales tax. Though the department hasn’t said it will subsidize the cost of automating sales tax compliance, it has said the use of a CSP will relieve taxpayers of liability upon audit.

Want to know where you’re at risk for developing a sales tax collection obligation? This state-by-state guide to sales tax nexus rules is a good place to start.