How small is small enough to sidestep remote sales tax laws?
Update 9.30.19: The Kansas Attorney General has determined Department of Revenue Notice 19-04 is "of no legal force or effect"; failure to include safe harbor for small sellers is "inconsistent with Wayfair." See Attorney General Opinion 2019-8 for more details.
If four lawmakers from New Hampshire and Oregon can convince enough colleagues in the capitol to support the Online Sales Simplicity and Small Business Relief Act, businesses with less than $10 million in total annual sales may be protected from other states’ remote sales tax laws. Currently, there’s no mandated exception for small sellers.
On June 21, 2018, the Supreme Court of the United States overruled a physical presence rule that had long prevented states from taxing remote sales. The court determined in South Dakota v. Wayfair, Inc. that an out-of-state seller could establish nexus through economic activity alone (economic nexus).
Most states celebrated the decision; indeed, Florida and Missouri are the only two states that have a general sales tax but haven’t yet adopted an economic nexus provision.
But there are five states* that don’t have a general sales tax, and some lawmakers in some of those states are determined to protect businesses from other states’ remote sales tax laws. Their most recent effort takes the form of the Online Sales Simplicity and Small Business Relief Act (S.2350) introduced by New Hampshire Senator Jeanne Shaheen. Sen. Maggie Hassan (NH), Sen. Jeff Merkley (OR), and Sen. Ron Wyden (OR) are co-sponsors.
The measure doesn’t seek to ban states from taxing remote sales — that’s unlikely to ever garner the necessary support. Instead, it would:
- Ban retroactive taxation of internet commerce
- Establish a small business remote seller exemption
- Require an orderly phase-in of compliance obligations
- Encourage states to develop an interstate compact to simplify remote sales tax compliance
These proposed actions capture the spirit of South Dakota v. Wayfair, Inc. In the decision, the Supreme Court highlighted three aspects of South Dakota’s tax system that “appear designed to prevent discrimination against or undue burdens upon interstate commerce”: South Dakota wouldn’t apply its economic nexus law retroactively; it would provide safe harbor for small businesses; and as a member of the Streamlined Sales and Use Tax Agreement, it had simplified sales tax compliance for remote sellers.
However, the Online Sales Simplicity and Small Business Relief Act may seek too much, too late.
Ban on retroactive taxation of internet commerce
The measure would prevent states from imposing a sales tax collection duty on a remote seller for sales made prior to June 21, 2018, (the date the seminal Supreme Court ruling was released).
This provision shouldn’t get too much pushback. None of the 43 states (plus Washington, D.C.) that have adopted economic nexus are applying it to sales made prior to the Wayfair decision. Most state economic nexus laws or rules have an enforcement date of July 1, 2018, or later, and most states have given remote sellers advance notice of an imminent collection duty.
Only New York skirts the retroactive enforcement ban, sort of: The New York Department of Taxation and Finance announced in January 2019 that “certain existing provisions” of the law “immediately became effective” with the June 2018 Supreme Court ruling. Yet even New York doesn’t reach back to pre-Wayfair sales.
Exemption for small remote sellers
The Online Sales Simplicity and Small Business Relief Act would establish a “small business remote seller exemption” for businesses with $10 million or less in gross annual receipts in the United States during the preceding calendar year. This would remain in place until 30 days after the date on which an interstate compact is established that would govern all states’ ability to impose a tax collection duty on remote sellers (more on the interstate compact below), thus encouraging states to develop such a compact.
Taking a cue from the Wayfair ruling, most states already provide an exception for small sellers — though none has a threshold nearly as large as $10 million. Economic nexus small seller exceptions vary by state. Here are some of the most common examples:
- $100,000 or more in sales (Colorado)
- $100,000 in sales or 200 transactions in the current or previous calendar year (South Dakota and others)
- $250,000 in sales and 200 or more retail sales and systematic solicitation of sales in the state (Connecticut)
- More than $500,000 in sales (California)
- More than $500,000 in sales and more than 100 transactions (New York)
Learn more about state economic nexus laws and small seller exceptions here.
Kansas is the only state that hasn’t provided a clear small seller exception. The Kansas Department of Revenue recently announced it would enforce an existing provision of the law that doesn’t include an exception for small sellers; it maintains it doesn’t have the authority to establish one. In theory, therefore, economic nexus could be established if a remote seller makes one sale into the state. The Kansas Legislature will likely be called upon to establish an economic nexus threshold when it reconvenes in January 2020.
Given that states have already established their own small seller exceptions, the $10 million threshold is likely to meet resistance in Congress.
Orderly (aka, delayed) phase-in
S.2350 would also mandate an “orderly phase-in of compliance obligations.” In other words, states could “impose a sales tax collection duty on a remote seller only for a sale that occurs after January 1, 2021.”
This is likely to get pushback because most states already enforce economic nexus. A handful are set to enforce it later this fall, and Louisiana has promised to enforce it on or by July 1, 2020. Budgets relying on remote sales tax revenue have been approved. It’s hard to imagine states pausing remote sales tax enforcement until 2021.
Establish an interstate compact
The bill also calls for states to establish an interstate compact for the collection of remote sales tax, to clearly define minimum substantial nexus between a remote seller and the taxing state, and to develop a process to simplify registration, collection, remittance, auditing, and other compliance processes to the greatest extent possible.
The goal of the interstate compact provision is to keep states from placing undue burdens on interstate commerce. Once such a compact is created and approved, the small business remote seller exception could be eliminated. The fact that Congress would have to approve the interstate compact is significant — the sponsors could delay the approval process for years.
Of course, a multistate compact designed to simplify remote seller sales tax compliance already exists: The Streamlined Sales and Use Tax Agreement. The 24 member states are required to have: a central, electronic registration system; consumer privacy protection; simplified administration of exemptions; simplified state and local tax rates; simplified tax remittances and returns; state administration of sales and use tax collections (no self-collecting local jurisdictions); uniform state and local tax bases; uniform sourcing rules for all taxable transactions; and uniform tax base definitions and rules. However, membership is not obligatory.
It will be interesting to see if the Online Sales Simplicity and Small Business Relief Act gets any traction. In the meantime, New Hampshire lawmakers have developed another way to protect New Hampshire businesses from other states’ remote sales tax laws. More details are available here.
Economic nexus is hogging headlines of late, but there are other ways for sellers to establish nexus in other states. Avalara’s seller guide to nexus laws and sales tax collection requirements can help you determine where you have an obligation to collect.
*Alaska, Delaware, Montana, New Hampshire, and Oregon.
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