Maine to tax out-of-state sellers

Update, 1.4.2018: New collection requirements for remote sellers took effect in Maine on Nov. 1, 2017.

Many retailers that are based in other states and don’t currently collect and remit tax on Maine sales may soon be required to do so under LD 1405, An Act to Require Remote Sellers to Collect and Remit Sales and Use Tax on Sales into Maine.

The bill imposes a tax obligation on out-of-state sellers if one of the following conditions is met during the previous or current taxable year:

• The seller’s gross revenue from taxable sales in Maine exceeds $100,000
• The seller made at least 200 separate sales transactions in Maine

Like all sales tax states, Maine already imposes a tax obligation on companies with a physical connection to it (nexus). In addition, it has required remote businesses with affiliate programs in Maine to collect and remit tax since 2013. LD 1405 goes a step further and establishes economic nexus, basing Maine’s right to tax remote sales on its economic need and remote retailers’ economic activity in the state. Learn more about nexus in Maine.

While retailers benefit from the Maine market, the measure explains, not taxing remote sales is “causing revenue losses and imminent harm” to the state by eroding its ability to fund state and local services. It adds that although remote sales of most tangible personal property and digital goods are taxable — consumers owe use tax if sales tax wasn’t collected at the time of sale — they are often marketed as tax free. Use tax compliance in all states is low.

Sales tax compliance is complicated, and retailers have long argued that collecting and remitting tax in other states is burdensome. LD 1405 maintains technological resources can now alleviate any undue burden: “Given modern computing and software options, it is neither unusually difficult nor burdensome for remote sellers to collect and remit sales and use taxes associated with sales into Maine.”

After explaining the state’s need for remote sales tax revenue and remote retailers’ ability to collect and remit it, the measure acknowledges an inherent problem: “The Legislature recognizes that the imposition of this requirement places remote sellers in a complicated position, precisely because existing constitutional doctrine calls the imposition of this requirement into question.”

In 1992, the United States Supreme Court upheld the precedent that states can only impose a tax obligation on businesses with a physical presence in the state (Quill Corp. v. North Dakota, 504 U.S. 298 (1992)). As a result, the Maine Legislature will not enforce the new law until its constitutionality “has been clearly established by a binding judgment.”

However, the legislature intends to apply the new law “to the limit of federal and state constitutional doctrines and to thereby clarify that the laws of this State permit [it] to immediately argue in any litigation that such constitutional doctrine should be changed to permit [these] tax obligations.” Given the opportunity, it would defend its new law before the Supreme Court, which could then repeal Quill. At least one Supreme Court Justice has said that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”

To expedite such a reconsideration, the law contains a provision allowing the state to “bring a declaratory judgment action” against any non-collecting remote seller meeting the criteria outlined in the bill. It also tasks Maine courts with acting “as expeditiously as possible” should that occur. The state would be prohibited from enforcing the law during pendency of action.

Governor Paul LePage vetoed An Act to Require Remote Sellers to Collect and Remit Sales and Use Tax on Sales into Maine on June 20. Although he supports a level playing field between in-state and out-of-state businesses, he is worried the bill would do more damage than good. When Maine began requiring remote companies with Maine affiliates to register and collect tax, numerous retailers severed their ties to Maine affiliates — including Amazon. He is loath to repeat that experience: “I am concerned that allowing LD 1405 to go into law will similarly cause small online retailers to cease selling their products to residents of the State of Maine.”

Furthermore, he noted the bill “positions Maine in conflict with” Quill, “which prohibits states from imposing a sales tax collection duty on retailers who have no physical presence within their borders.” Gov. LePage supports a repeal of Quill but lacks the appetite to seek it. He considers it “unwise for Maine to become a national outlier and needlessly expose the state to litigation.”

Instead, the governor is pushing for a federal solution: The Marketplace Fairness Act (MFA). A 2017 version of MFA was introduced this spring, as was an updated version of the Remote Transactions Parity Act (RTPA). Both bills would grant states with simplified sales and use tax administration the right to tax large remote retailers. However, Congress is too divided over this and other issues to act on it. In 2013, an earlier version of MFA was approved in the Senate but left to gather dust by the House Judiciary Committee. Subsequent versions of MFA and then RTPA have gone nowhere.

State lawmakers overwhelmingly approved an override of LePage’s veto. LD 1405 is set to take effect October 1, 2017.

Learn more about state economic nexus policies and how they affect remote sellers.