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Storing property in Virginia creates tax obligation for out-of-state sellers

  • Feb 23, 2017 | Gail Cole

 Virginia clarifies nexus for out-of-state sellers.

Update 5.4.2017: Virginia Tax Bulletin 17-3, released May 3, provides guidance to facilitate compliance with SB 962 and HB 2058 (2017 Acts of Assembly, Chapters 51 and 808). This post has been updated to reflect that the changes take effect June 1, 2017.

Update, 4.10.2017: Virginia Senate Bill 962, which is similar to HB 2058, has been enacted. It, too, provides that storage of inventory in the Commonwealth is sufficient nexus to require out-of-state businesses to collect sales and use tax on sales to customers in the Commonwealth.

Beginning June 1, 2017, Virginia will require any out-of-state dealer who owns tangible personal property in the state that is for sale to collect and remit Virginia sales and use tax. This is expected to generate approximately $21 million annually, beginning in Fiscal Year 2018.

House Bill 2058, signed into law on February 22, 2017, clarifies that the storage of inventory within the Commonwealth establishes nexus, a connection with Virginia that is substantial enough for the state to impose a tax collection obligation on an out-of-state dealer. Virginia law currently doesn’t specify that the presence of inventory in Virginia establishes nexus.

Nexus for out-of-state sellers

The bill’s fiscal note explains that the Commerce Clause of the U.S. Constitution empowers Congress with the right to regulate commerce among states. It references the Supreme Court of the United States’ decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992); “the Commerce Clause barred a state from requiring an out-of-state mail-order company to collect use tax on goods sold to customers located within the state when the company had no outlets, sales representatives, or significant property in the state.”

Under Virginia’s current retail sales and use tax law, the note explains, “Many out-of-state sellers avoid collecting sales tax on their sales to Virginia customers by choosing not to have a physical presence within Virginia’s borders.” Yet these sellers often store their goods “in Virginia fulfillment centers and warehouses owned by unrelated third parties.” Such sellers “are arguably not required to register as dealers for sales tax collection under current law because, under Virginia law, having inventory stored within Virginia is not listed as one of the factors requiring registration.”

In Quill Corp. v. North Dakota, the state of North Dakota unsuccessfully went after tax revenue from the Quill Corporation, which made close to $1 million in sales to North Dakota customers via mail-order and phone sales in the early 1990s. Today, the internet has made it easier than ever for out-of-state vendors to reach customers. Like North Dakota then, a growing number of states today are striving to capture tax revenue from remote sellers. Alabama, South Dakota, Tennessee, and others have either instituted or are working on policies whereby out-of-state sellers establish nexus via ties to in-state affiliates (affiliate nexus), referrals from in-state websites (click-through nexus), or doing a certain amount of business in the state (economic nexus). These policies challenge the precedent upheld in Quill, and that’s the point. Read Revenge of the Dakotas: A Challenge to Quill.

Virginia HB 2058 doesn’t challenge Quill. As the fiscal note explains, “This bill would allow Virginia to exercise the full authority granted to all states under the Constitution as set forth in Quill.”

Waiting for Congress

Yet in Quill, the Supreme Court stated that Congress not only has the “ultimate power to resolve” the underlying issue, but that it “may be better qualified” to resolve it. Legislators in Virginia have long been waiting for Congress to address this issue. In fact, in 2013, Virginia linked its gas tax rate to the fate of federal remote sales tax legislation: The gas tax rate would increase by 1.6 percent unless federal lawmakers made it easier for states to tax remote sales. The gas tax rate increased on January 1, 2015.

It was a gamble, but federal action seemed possible at the time. In May 2013, the Senate passed the Marketplace Fairness Act of 2013, which allowed states with simplified sales tax laws to require remote sellers to collect and remit their sales taxes. Yet the bill had powerful opponents in the House, and it was shelved. Subsequent attempts at similar legislation since then have gone nowhere.

Unless and until there is resolution from Congress or the Supreme Court, states will likely continue to stretch their sales and use tax laws to capture as much revenue as possible from out-of-state sellers.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.