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Is Congress about to change nexus as we know it?

  • May 26, 2017 | Suzanne Kearns

If you think you understand how nexus works, everything you know may soon be turned on its head. That’s because two bills were assigned to congressional committees on April 27 that could change the rules that govern nexus in this country.

States have long lamented the fact that they lose a lot of sales tax revenue when online retailers that don’t have nexus in their state sell products to state residents. That’s because if a retailer doesn’t have nexus in a state, they are not required to collect and remit sales tax to that state. The resident is supposed to pay use tax, but shoppers rarely follow those laws -- and states rarely enforce them.

First, a little background

It all began in 1992 when the Supreme Court ruled on Quill Corp v. North Dakota. The decision stated that a state did not have the authority to require out-of-state retailers to collect and remit sales tax unless the retailer had a physical presence in that state. Since then, consumers have enjoyed tax-free purchases when buying from out-of-state sellers.

But recently, states have begun pushing the boundaries of that decision.

And now come the two federal sales tax bills that will make their way to a vote by the full the House and Senate if approved by their respective committees. Here is a basic breakdown of each bill.

The Marketplace Fairness Act of 2017

This bill was introduced in various forms in 2013 and 2015, and now it’s making an appearance again in 2017. The Marketplace Fairness Act of 2017 was sponsored by Senator Michael Enzi (R-WY) and is currently being reviewed by the Senate Committee on Banking, Housing, and Urban Affairs.

Here is a breakdown of the key points in the bill.

  • Internet retailers who gross more than $1 million in sales nationwide could be forced by states to collect and remit sales tax, regardless of whether or not they have nexus in that state. Keep in mind that sellers who have nexus in other states would still be required to collect sales tax to remit to those states.
  • States in compliance with the Streamlined Sales and Use Tax Agreement will be authorized to require sellers who gross the minimum to collect and remit sales and use tax.
  • States that are not members of the Streamlined Sales and Use Tax Agreement could also require retailers to collect and remit the tax if they meet certain requirements set out by the bill.
  • States would have to follow a few new rules as well, such as making sure out-of-state retailers only have to file sales tax with one taxing authority, not requiring remote sellers to file more frequently than brick-and-mortar stores in the state, and limiting retailer’s audits to only one taxing authority within the state.

This bill would eliminate the requirement that retailers have a physical location in a participating state, and make it possible for states to require all retailers that gross more than $1 million per year to collect and remit sales tax.

The Remote Transaction Parity Act of 2017

Rep. Kristi Noem (R-SD) sponsored this bill, and it’s been assigned to the House Subcommittee on Regulatory Reform, Commercial and Antitrust Law for review.

The key points of this bill are as follows.

  • The bill would be phased in within three years. The first year, only those remote sellers who gross $10 million or more would be required to collect sales tax. Sellers who gross more than $5 million would be phased in during the second year, and those that sell $1 million or more would be phased in during the third year.
  • Sellers who use “an electronic marketplace for the purpose of making products or services available for sale to the public” would be phased in during the first year, and there is no minimum sales amount. In other words, even small sellers who use eBay, Amazon or Etsy would be required to collect sales in states where they don’t have nexus. (As with the other bill, sellers would also be required to collect sales tax in those states where they do have nexus.)
  • Both member and non-member states of Streamline Sales and Use Tax Agreement have to follow the same three rules explained in the Marketplace Fairness Act of 2017. In addition, states have to provide free access to a national certified software provider to help determine the correct sales and use tax rate.

This isn’t the first time legislatures have considered a federal sales tax rule, and it probably won’t be the last. States are scrambling to make up sales tax revenue lost to noncollecting out-of-state sellers, and it’s possible that one of these bills could change the way online retailers pay sales tax.

We’ll keep you updated as things progress.

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