Rhode Island to tax out-of-state retailers, referrers, and sale facilitators
- Aug 14, 2017 | Gail Cole
Beginning Aug. 17, 2017, non-collecting retailers, referrers, and retail sale facilitators that make or facilitate Rhode Island sales must either register and collect sales and use tax, or comply with new notice and reporting requirements.
The Rhode Island Legislature recognizes that states are prohibited from imposing an undue burden on interstate commerce. Under Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a state can only impose a tax collection obligation on a business that has a substantial connection with that state (nexus), defined as a physical presence.
However, the legislature finds that “it is no longer an undue burden for non-collecting retailers to accurately compute, collect and remit and/or report” Rhode Island sales and use tax. This is due to “the ready availability of sales and use tax collection software,” and the fact that Rhode Island complies with the Streamlined Sales and Use Tax Agreement — a joint effort by states “to simplify sales and use tax collection and administration by retailers and states.”
Internet “cookies” = physical presence
Furthermore, the internet now permits out-of-state businesses to have a substantial connection with a remote state through the use of in-state software such as cached software (“cookies”) or “other data tracking tools.” In layman’s terms, internet cookies are what enables a business to recognize and track the preferences of people who browse and shop online.
Massachusetts was the first state to base physical presence on a business’s use of web cookies, though its policy was revoked after being challenged on procedural grounds. The Massachusetts Department of Revenue is now working on new regulation. Ohio then enacted a tax on remote vendors that use internet cookies; it, too, is being challenged.
Now Rhode Island’s Non-Collecting Retailers, Referrers, and Retail Sale Facilitators Act (Chapter 18.2 of House Bill 5175) maintains that the use of “in-state software on the devices of in-state customers constitutes physical presence,” if not in the traditional sense. Therefore, businesses that use such methods to establish and maintain a market in Rhode Island are considered to have nexus with the state as of Aug. 17, provided they meet one of two sales thresholds.
The new collection or notice and reporting requirements apply to a non-collecting retailer, referrer, or sale facilitator that in the immediate preceding calendar year either:
- Had $100,000 in gross revenue from the sale of taxable goods or services (including prewritten computer software delivered electronically or by load and leave) delivered in Rhode Island; or
- Made 200 or more transactions of taxable goods or services (including prewritten computer software delivered electronically or by load and leave) delivered in Rhode Island.
The measure defines and imposes requirements on noncollecting retailers, referrers, and sales facilitators in great detail, summarized below.
Rhode Island defines “non-collecting retailer” as a person who meets one of the following criteria:
- Uses in-state software to make retail sales of taxable goods or services, including prewritten computer software delivered electronically or by load and leave
- Sells, leases, delivers, or participates in any activity in Rhode Island connected to the sale, lease, or delivery of the above
- Uses a sales process that includes branding, exchanging, fulfilling, processing, selling, and soliciting
- Sells taxable goods or services through retail sale facilitators
- Is related to a person with a physical presence in Rhode Island (see Section 44-18.2-2(4)E) for details)
Non-collecting retailers that opt to collect and remit sales tax must register with the state and start charging tax on taxable sales by Aug. 17. Those preferring to take advantage of the notice and reporting option must, by Aug. 17, meet all the following notice and reporting requirements:
- Post this Website Notice on their website
- Provide customers with a Checkout Notice at the time of purchase
- Send customers a 48-Hour Notice within 48 hours of purchase
- Send, by Jan. 31, an Annual Notice to customers with at least $100 in annual purchases
- Provide, by Feb. 15, an Annual Attestation that the notice requirements were fulfilled
Rhode Island defines “referrer” as one that does not collect payments from in-state customers on behalf of a retailer but does:
- Contract with the retailer to advertise or list for sale, in Rhode Island, taxable goods or services
- Receive a fee, commission, or other compensation from the retailer for advertising or listing taxable goods or services for sale
- Transfer an in-state customer to the retailer via the internet or another method
Starting Aug. 17, once a referrer cumulatively receives more than $10,000 from commissions, fees, or other compensation, it must comply with a new notification requirement. Within 30 days of meeting that threshold, the referrer must notify retailers that their sales may be subject to Rhode Island sales and use tax.
Retail sale facilitator
Rhode Island defines “retail sale facilitator” as one that either uses in-state software to make sales at retail, or does both of the following:
- Contracts or agrees with a retailer to list and/or advertise taxable goods and services in Rhode Island
- Directly or indirectly collects payments from in-state customers and transmits payments to a retailer
Beginning Jan. 15, 2018, a retail sale facilitator must annually provide to the Rhode Island Division of Taxation both of the following:
- A list of names and addresses of retailers for whom it collected Rhode Island sales tax
- A list of names and addresses of retailers that used its services but for whom it did not collect Rhode Island sales tax
Additional information about the Non-collecting Retailers, Referrers, and Retail Sale Facilitators Act is available from the Rhode Island Division of Taxation (See 2017 Tax Notices 03-10) and the text of RI H5175.
Rhode Island is not unique in upping efforts to collect tax from remote internet sellers. Like The Ocean State, Minnesota and Washington have both enacted laws that impose tax or notification and reporting requirements on marketplace sellers. It is getting increasingly risky for non-collecting retailers to not collect and remit tax in all states where they sell.
FBA sales tax amnesty
Yet, if a growing number of states are cracking down on non-collecting out-of-state sellers, some are also offering an olive branch in the form of tax amnesty or voluntary disclosure programs.
By coincidence, Aug. 17 also marks the start of a combined sales/use and income/franchise tax amnesty program for Fulfillment by Amazon (FBA) and other marketplace providers. This is not to be confused with the tax amnesty program Rhode Island is offering Dec. 1, 2017, through Feb. 15, 2018.
Between Aug. 17 and Oct. 17, unregistered marketplace sellers whose sole connection to a participating state is through inventory stored in a marketplace provider’s warehouse or fulfillment center are invited to apply to the Online Marketplace Seller Voluntary Disclosure Initiative. In exchange for registering with a state or states and collecting and remitting sales tax from Dec. 1, 2017 forward, participating states will forgive some or all back taxes, and waive all or a portion of the penalties and interest owed.
To date, 20 states and the District of Columbia have agreed to participate in the Online Marketplace Seller Voluntary Disclosure Initiative, which is being coordinated by the Multistate Tax Commission. Most will forgive all back taxes and waive any interest and penalties associated with them. These are:
- New Jersey
- South Dakota
The remaining states are offering amnesty with limitations
- Washington, D.C.3
- Colorado will forgive any back sales/use tax, but it won’t waive back tax liability for income tax beyond its normal four-year look-back period.
- Nebraska will consider waiving back sales/use tax and income tax liability.
- Washington D.C. will consider a shorter look-back period than its typical three years for both sales/use and income/franchise tax.
- Wisconsin will require businesses to remit unpaid sales/use and income/franchise tax plus interest going back to Jan. 1, 2015.but will forgive taxes dating from before that date.
A handful of other states have expressed interest in the amnesty program. A definitive list of participating states is expected by Aug. 14. See The FBA sales tax amnesty program explained for additional information.
There’s a lot going on in the world of sales tax right now, especially for companies with actual or potential tax obligations in multiple states. Tax automation software can facilitate compliance and help businesses navigate this complex world. Learn more.