Rhode Island governor would tax marketplace sales and Netflix

Sales tax “modernization” is on the tip of many tongues these days. Massachusetts Governor Charlie Baker, New York Governor Andrew Cuomo, and Utah Governor Gary Herbert all have plans to bring sales tax laws into the modern age, as does Rhode Island Governor Gina Raimondo.

Gov. Raimondo introduced her “sales tax modernization” plan in the Executive Summary for the Fiscal Year 2020 operating budget. She recommends: eliminating “a loophole” that enables many marketplace sales to go untaxed; extending sales tax to currently exempt activities and services; taxing sales of digital downloads; and taxing vaping products.

Close the marketplace “loophole”

Like their physical counterparts, online marketplaces bring together numerous sellers under one roof, or platform. Amazon runs a marketplace, as does Barnes & Noble, eBay, Etsy, Walmart, and a host of other businesses. Amazon, Barnes & Noble, Walmart, and many other marketplace facilitators also sell their own products.

Until last year, a seller could only be obligated to collect sales tax in states where it had some sort of physical presence. This physical presence rule was overruled by the Supreme Court of the United States in South Dakota v. Wayfair, Inc. (June 21, 2018). Since then, approximately 35 states have adopted economic nexus laws imposing a sales tax collection obligation on businesses with a certain amount of economic activity in the state (e.g., more than $100,000 in sales or at least 200 separate transactions in the state in the current or preceding calendar year). Yet many marketplace sales still go untaxed in most states.

Here's the “loophole” the governor wants to eliminate: Many marketplace facilitators insist they’re not the retailer for their marketplace sales — the third-party or marketplace seller is. Since they’re not the retailer, they can’t be compelled to collect and remit tax under most state economic nexus laws. And indeed, although Amazon has collected tax on its own sales in all states with a sales tax since April 1, 2017, in most states it doesn’t tax marketplace sales unless the seller asks it to and pays for that service.

By the end of 2017, marketplace sales comprised over half of Amazon’s total sales and a rapidly growing portion of all internet sales. Thus, although more and more states now tax remote sales, many marketplace sales are still going untaxed.

To close it, a handful of states have enacted marketplace facilitator sales tax laws that give marketplace facilitators a choice: Collect and remit sales tax on all sales into the state, or comply with non-collecting seller use tax notice and reporting requirements. Arizona, Minnesota, Oklahoma, Pennsylvania, and Washington were early adopters. So was Rhode Island. In fact, a law requiring online retailers, referrers, or sale facilitators with economic nexus in the state to collect and remit sales tax or comply with notice and reporting requirements took effect in Rhode Island on August 17, 2017. Rhode Islanders began receiving notices and reports from businesses in early 2018, about the time Amazon provided the Rhode Island Division of Taxation with information about third-party sellers.

Nonetheless, the loophole in Rhode Island’s law still exists, and Gov. Raimondo wants to close it.

Broaden sales tax to activities and services

The budget singles out the following currently exempt activities and services for taxation:

• Hunting, trapping, and shooting ranges
• Interior design services
• Lobbying services
• Services to commercial buildings

Tax digital downloads

Much of the entertainment consumed these days is delivered via digital downloads. Gov. Raimondo would tax the digital transfer of ebooks, music, and videos.

Tax vaping products, other tobacco products, and retail sales of marijuana

The budget proposal includes the following:

• A 40 percent wholesale tax on liquid nicotine/e-cigarettes
• A $0.25 cigarette excise tax increase (from $4.25 to $4.50 per pack)
• A $0.30 increase on the Other Tobacco Products (OTP) Cigar Tax Cap (from $0.50 to $0.80)

Finally, the budget would allow the retail sale of marijuana, taxed as follows:

• 10 percent adult use marijuana retail excise tax
• $10/oz flower, $3/oz trim marijuana cultivator weight-based excise tax
• 80 percent Cannabis Excise Tax for hemp-derived cannabis products

Raimondo says her budget “sets Rhode Island on a patch for long-term prosperity.” The proposed sales and use tax changes would bring in an extra $24,039,814 in the upcoming fiscal year. The taxes on vaping products, other tobacco products, and marijuana and hemp products would generate approximately $8.5 million more. If the governor succeeds in turning these proposals into law, you can read about it in the Avalara sales and use tax compliance blog.

Learn more about Rhode Island sales tax.