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Should You Notify Customers of Their Use Tax Obligations?

  • Dec 28, 2015 | Suzanne Kearns

As if collecting sales tax isn’t complicated enough, some states are passing laws that require out-of-state sellers to notify their purchasers that use tax may be required on transactions.

Colorado, South Carolina, South Dakota, Vermont, Oklahoma, Kentucky, and Tennessee have all passed such laws, although not all of them have been upheld in the courts.

The laws are quickly changing, and it’s important to stay up to date on them if you sell in one of the seven affected states. Here’s the latest on use tax notification rules.

What Is Use Tax?

Let’s start by defining what use tax is, and who needs to pay it. When consumers purchase goods online from sellers that don’t have nexus, the state loses out on the sales tax revenue because the seller isn’t required to collect it. The law in most states says that buyers should report the uncollected tax on their tax returns. This is called use tax.

But hardly anyone follows this law. And this low compliance rate has inspired some states to pass laws that require out-of-state sellers to notify customers when they are required to pay use tax to their state.

How Do I Comply with the State’s Laws?

If you sell to customers in any of the above-listed states and don’t have nexus in that state, you may be required to notify your customers of their use tax obligations when they make a purchase.

The notification requirements are different in each state, but generally you will be required to post the notice on your website, in your catalog (if you have one), and on every electronic notice or invoice you send the customer. Keep in mind that failure to adhere to state laws may result in penalties.

Here’s a brief overview of the current laws in each state that has weighed in on this so far.

  • Colorado: In 2010, Colorado passed a law requiring out-of-state retailers to notify customers of their requirement to pay use tax, but a federal judge issued an injunction that prohibited the enforcement of the law. The state appealed and won, but last February, a Denver judge granted another temporary injunction against the law. It remains to be seen whether or not retailers selling in Colorado will have to provide notifications to Colorado customers.
  • Kentucky: On July 1, 2013, Kentucky enacted a law that requires remote vendors who expect more than $100,000 in sales to Kentucky residents to inform those customers of their requirement to pay use tax if there was no sales tax collected on their purchases. This document contains all the relevant information and links to the documents you’ll need to comply.
  • OklahomaChapter 65 of the Sales and Use Tax law says that all out-of-state retailers who are not obligated to collect sales tax must inform Oklahoma residents of their obligation to pay use tax on their purchases.
  • South Carolina: This state requires businesses that meet a long list of requirements to inform their customers that they may owe use tax to the state. In addition, in exchange for Amazon building two fulfillment centers in the state and creating 2,000 jobs, South Carolina granted an extension to the company for sales tax collections, and Amazon only has to notify its South Carolina customers of their use tax obligations until 2016.
  • South Dakota: If you collect $100,000 or more in sales from South Dakota residents, you are required to provide use tax notifications to them. The State offers very specific rules about where you should post the notices and what they should say.
  • Tennessee: If you work with affiliates who have non-retail facilities or meet certain capital investment and job requirements, state laws may require you to inform Tennessee customers of their duty to pay use tax.
  • Vermont: If you don’t have nexus in Vermont, but expect to collect more than $100,000 in gross sales from Vermont customers, you are required to inform your Vermont customers of their obligation to pay use tax. Section 9783 of the State’s tax code outlines the requirements.

It’s possible that more states will follow suit and pass their own legislation that requires you to inform customers of their obligation to pay use tax. Stay up to date by following our blog and reading about the latest changes in sales and use tax law.

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.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns