North Carolina considers remote sales tax legislation
- Jun 21, 2017 | Gail Cole
Update 7.5.17: The legislative session closed without the enactment of S.B. 81. However, two special sessions have been called, for August 3 and September 6, when S.B. 81 or a similar remote sales tax bill could be considered.
The North Carolina Legislature is looking to increase its tax from remote sales. Like many states, it’s caught between a rock and a hard place. It would like to increase sales and use tax collections, which have declined as sales by non-collecting out-of-state sellers have increased. On the other hand, it is cognizant that states are prohibited from imposing a tax obligation on sellers lacking nexus — a substantial connection generally defined as a physical presence — with the state.
The physical presence precedent was upheld by the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), decided prior to the birth of internet commerce. Since then, it has grown increasingly easy for ecommerce businesses to market and sell to consumers in any state.
Numerous states have therefore expanded their definition of nexus to include relationships with in-state affiliates (affiliate nexus), referrals from links on in-state websites (click-through nexus), and economic activity in the state (economic nexus). Some of these laws, including Alabama’s and South Dakota’s, are being challenged, and these states hope to defend them before the Supreme Court, which could then overturn Quill (South Dakota happy its law is unconstitutional).
Some members of Congress would also like states to be able to tax certain remote sales. To that end, they have introduced the Marketplace Fairness Act of 2017 (now on its third iteration) and the Remote Transactions Parity Act of 2017 (on its second). Conversely, the updated No Regulation Without Representation Act of 2017 would codify Quill, definitively restricting states from taxing interstate commerce.
North Carolina Senate Bill 81 seeks to expand the state’s definition of nexus to include economic activity. Under the bill, a retailer making remote sales in North Carolina would be engaged in business in the state and subject to tax if, during the retailer’s previous taxable year, at least one of the following conditions is met:
- The retailer has gross sales in excess of $100,000 in North Carolina
- The retailer makes 200 or more separate transactions in North Carolina
Additionally, SB 81 would impose a tax obligation on marketplace providers, those who facilitate sales of tangible personal property, digital property, or services, directly or through arrangements with third parties. Etsy is a marketplace provider, as are Airbnb, eBay, and Amazon (although Amazon also sells its own products). According to the bill, a person facilitates a sale when the person does any of the following:
- Makes available the forum or platform in which, or by means of which, the retail sale takes place
- Makes available the forum or platform in which, or by means of which, the offer of sale is accepted
- Makes available or has another party make available a mobile phone application or other applications to assist with the sale of products
- Collects payment from the consumer and transmits that payment to the retailer, regardless of whether the person receives compensation or consideration in exchange for its services
How likely is it this will pass?
The measure has been favorably received in the Senate and is currently being reviewed by the Committee of Finance. However, it is late in their legislative session, and the closer the legislature gets to approving a budget, the less likely it is SB 81 will be approved. If enacted as written, the economic nexus provision would take effect January 1, 2018. The marketplace provider provision would apply to sales made on or after July 1, 2019.
Learn more about nexus in North Carolina and other states at Avalara Resource Center Nexus.