Online Sellers’ Guide to 2018 Sales Tax Changes
- May 11, 2018 | Gail Cole
Every year brings numerous changes to state and local sales and use tax rates, regulations, and rules, and this year is no different. But 2018 could be a tipping point for sales and use tax, especially with respect to online sellers.
States have been working for years to increase sales tax collections from out-of-state sellers, and their efforts are intensifying. In 2018, there’s movement on two fronts:
- The Supreme Court of the United States is reconsidering the physical presence standard that currently prevents states from taxing sales by most out-of-state sellers.
- States are finding creative ways to increase remote sales tax collections.
Sales and use tax compliance for online sellers is likely to be affected no matter what.
Supreme Court reconsiders physical presence limitation
Precedent holds that states can only impose a tax collection obligation on a business that has a substantial connection, or nexus, with the state. In Quill Corp. v. North Dakota (1992), the Supreme Court affirmed that this connection must be physical in nature.
Many states have pushed against this physical presence limitation for decades, and their efforts have intensified with the rise of internet shopping. According to the U.S. Government Accountability Office, states lost as much as $13.4 billion in sales and use tax revenue in 2017 because of their inability to tax remote sales. That’s a compelling reason for states to challenge the status quo.
In 2016, South Dakota adopted an economic nexus provision under which an out-of-state business establishes nexus through its economic activity in the state. It imposes a tax collection obligation on businesses that have more than $100,000 in gross revenue from taxable sales delivered into South Dakota, or at least 200 separate taxable sales into the state.
The law was immediately embroiled in a legal battle and found itself on the steps of the Supreme Court in record time. The Supreme Court granted South Dakota’s petition for a writ of certiorari on January 12, 2018, heard oral arguments in South Dakota v. Wayfair, Inc. on April 17, and is expected to issue a decision in June.
If the court sides with South Dakota, other states are likely to adopt economic nexus regulations. Several already have; the Iowa Legislature approved an economic nexus measure this session; and Governor Nathan Deal of Georgia signed an economic nexus provision into law last week.
If the court sides with Wayfair, states are likely to continue to push against the physical presence limitation. One option open to them is imposing use tax notice and reporting requirements on non-collecting sellers. Another is to tax online marketplace sales.
What you may have to do if you don’t collect sales tax
Most states require consumers to remit use tax if sales tax wasn’t collected on a taxable transaction at the point of sale. Yet use tax compliance is extremely low, and costly for states to enforce. Enter use tax notice and reporting requirements.
While states lack the authority to force a tax collection obligation on many remote retailers, they can require them to notify purchasers that they don’t collect sales tax in the state, and that the purchaser may have to remit use tax on the sale.
States can also require non-collecting retailers to share consumer purchase information with consumers and state tax authorities alike. Reports of consumer purchaser activity typically include the total amount paid by the purchaser to the retailer in a year; the date, amount, and type of each purchase; and the purchaser’s address. These are typically remitted annually; however, a bill now under consideration in Iowa would impose monthly reporting obligations on non-collecting sellers.
These use tax notice and reporting requirements are onerous, but the Supreme Court has allowed them to stand. Since Colorado won the right to enforce its use tax notice and reporting requirement last year, several other states have adopted similar provisions. These include Alabama, Louisiana, Oklahoma, South Carolina, Washington, and Vermont. Many other states are considering them.
Taxing the online marketplace
Amazon has collected and remitted tax in all states that have a general sales tax since April 2017 — but only on its own sales. More than half of the products sold on Amazon are owned by third parties selling on the Amazon marketplace, and these are going untaxed in most states. The same is true with other online marketplaces, such as eBay and Etsy.
Once that loophole came to light, states scrambled to close it. A growing number of states now require marketplace facilitators that have a warehouse or fulfillment center in the state to collect and remit tax on their third-party sales into the state, or comply with the use tax notice and reporting requirements described above.
States that have adopted marketplace sales tax laws or rules include Alabama, Arizona, Minnesota, Oklahoma, Pennsylvania, Rhode Island, and Washington. More are likely to follow.
Some other states have asked marketplace facilitators to identify their third-party sellers so the states can ensure they’re collecting any and all of the taxes they owe. So far in 2018, Amazon has shared seller information with Massachusetts and Rhode Island. Newegg, another large ecommerce seller, identified its customers at the behest of the Connecticut Department of Revenue Services.
In short, it’s feeling a bit like the Wild West in the world of ecommerce and sales tax.
Will the long arm of Congress make peace?
With states taking matters into their own hands, each in its own way, navigating sales tax compliance has become more challenging than ever for online sellers.
Congress could intervene. It’s considered several measures that would allow states with simplified sales and use tax reporting the right to tax certain remote sales: The Marketplace Fairness Act (MFA), the Remote Transactions Parity Act (RTPA), and the Online Sales Simplification Act (OSSA). Conversely, the No Regulation Without Representation Act would codify Quill, reaffirming and even expanding the physical presence limitation.
The Supreme Court suggested in Quill that “Congress may be better qualified to resolve the issue” of remote sales tax. To date, it hasn’t — but a Supreme Court decision in South Dakota v. Wayfair, Inc., could spur it into action later this year.
Online sellers, are you ready?
No matter what you sell or where you sell it, you’re sure to encounter sales tax changes with a certain degree of regularity. Staying on top of them — and knowing how to respond to them — is the best way to remain in compliance.
Yet this is challenging for online sellers in 2018. A growing number of states are more determined than ever to capture more sales and use tax revenue from you. They’re unlikely to let up, no matter what happens with the Supreme Court or Congress. The days of “tax-free” online shopping may soon be coming to an end.
Want to learn more? Get the Online Sellers’ Guide to 2018 Sales Tax Changes.