50 ways to tax a remote sale – Wacky Tax Wednesday
“50” may be hyperbolic, but I just can’t resist a nod to that old Paul Simon song.
When the Supreme Court of the United States overruled a long-standing physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018), it freed states to tax remote sales. What it didn’t do was set parameters for how to do that. Consequently, there are many ways (50?) for a state to tax remote sales.
There’s affiliate nexus, click-through nexus, cookie/software nexus, and economic nexus (nexus is the connection between a business and a state that enables the state to tax the business). There are tax collection obligations for referrers and marketplace facilitators. And there are use tax notice and reporting requirements for non-collecting sellers (and referrers, and facilitators). When you consider the number of remote sales tax laws in each state, and the fact that each state law is different, “50 ways to tax a remote sale” doesn’t seem like an exaggeration at all.
Take a look at the map and chart on this South Dakota v. Wayfair, Inc. resource page. It shows the different ways each state has tried to capture remote sales tax revenue over the years. Most states have more than one law on the books.
Early efforts relied on affiliate nexus, whereby a remote vendor’s association with an in-state business triggers a sales tax collection obligation. As ecommerce grew, more states embraced click-through nexus, which imposes a sales tax collection obligation on vendors that generate a certain amount of business through referrals from an in-state business (often through links on a website). Numerous states jumped on that bandwagon after the Supreme Court of the United States refused to hear a challenge to New York’s click-through nexus law in 2013, effectively allowing it to stand.
New York’s victory aside, affiliate and click-through nexus laws were vulnerable to legal challenges before the Wayfair ruling. As attorney and sales tax expert Stephen Kranz wrote of these laws in 2013, “It remains to be seen how such laws will be enforced. … Unless federal legislation is enacted allowing states to require tax collection by out-of-state retailers … continuing nexus disputes between states and out-of-state retailers are likely.”
So, states continued to push the boundaries of the physical presence rule, finding new ways to increase tax collections from remote sales.
Before Wayfair, a handful of states adopted cookie or software nexus, whereby remote internet vendors establish a physical presence in the state by placing web cookies or software on in-state computers — a common practice that helps internet sellers track consumer habits. The Massachusetts Department of Revenue maintains its regulation “continues to apply and is not impacted by the Supreme Court’s decision.”
Finally, states came up with economic nexus, whereby significant economic activity in a state (sales and/or transaction volume) establishes a sales tax collection obligation for remote vendors. South Dakota led the charge on this one, and in tribute to its success, its name will go down in history with South Dakota v. Wayfair, Inc.
Economic nexus was the golden ticket for states because it triggered the end of the physical presence rule. More than 30 states have adopted economic nexus since the June 2018 Wayfair ruling, and many others are working to enact it this session. Nonetheless, states are still pushing ahead with other ways to increase remote sales and use tax collections.
More than 20 states have marketplace facilitator sales tax legislation in the pipeline, including many states that already enforce economic, cookie, click-through, and/or affiliate nexus. Requiring marketplace facilitators to collect and remit tax on behalf of their sellers can facilitate collections for state tax authorities as well as reduce the burden of compliance for marketplace sellers.
Then there’s non-collecting seller use tax reporting. Colorado spent years fighting for the right to impose notice and reporting requirements on non-collecting sellers, becoming the first state to do so on July 1, 2017. Other states quickly followed suit, and today use tax notice and/or reporting requirements for non-collecting sellers have been adopted by more than 10 states.
Although such requirements could be considered outdated given the Wayfair ruling, at least one state (Hawaii) is considering a use tax reporting measure this session despite the fact that it already enforces economic nexus.
Of course, not all states have multiple remote sales tax laws on the books. Ten states only have one: Arizona, Hawaii, Idaho, Indiana, Maryland, Massachusetts, Mississippi, Nebraska, North Dakota, and Wisconsin. Yet several of these are looking to impose one or more new requirements on remote sellers:
- Arizona, Idaho, and Massachusetts are working to enact both economic nexus and a marketplace facilitator sales tax law.
- Hawaii, Indiana, Maryland, Nebraska, and North Dakota are considering marketplace facilitator sales tax laws.
- And, as stated above, Hawaii is pursuing use tax reporting requirements for non-collecting vendors.
All these different laws make my job incredibly interesting. But for businesses, they translate to a confusing web of requirements that make sales tax compliance that much more complex and burdensome. And, for now at least, there seems to be no end to the complexity.
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