Virginia looks to tax remote sales in mid-2019
- November 5, 2018 | Gail Cole
Virginia is one of a handful of states that hasn’t publicly reacted to South Dakota v. Wayfair, Inc. and the decision by the Supreme Court of the United States that grants states the authority to tax remote sales. However, the state will reportedly require certain out-of-state sellers to collect and remit sales tax in mid-2019.
Few details about Virginia’s plan are known at this point. However, according to Virginia Finance Secretary Aubrey Layne, Jr., “the administration is working on a bill that would include a small-seller exemption and marketplace provisions” (hat tip to Bloomberg BNA).
The significance of South Dakota v. Wayfair, Inc.
The South Dakota law that sparked South Dakota v. Wayfair, Inc. bases a sales tax collection obligation on a remote seller’s economic activity in the state (economic nexus), not physical presence. Before the Supreme Court ruled in favor of the state on June 21, 2018, all states were prevented from taxing remote sales because of a long-standing physical presence rule upheld by the Supreme Court in 1992 (Quill Corp. v. North Dakota).
The physical presence rule was established to prevent states from placing “undue burdens” upon interstate commerce. Overruling the physical presence requirement in Wayfair, the court highlighted three features of South Dakota’s tax system that “appear designed to prevent discrimination against or undue burdens upon interstate commerce.” These are:
Safe harbor: South Dakota’s economic nexus law provides an exception for sellers with less than $100,000 in sales or fewer than 200 transactions in the state in the current or previous calendar year
No retroactivity: South Dakota’s economic nexus law can be applied on a prospective basis only
Membership in the Streamlined Sales and Use Tax Agreement: South Dakota has standardized taxes to reduce administrative and compliance costs
Many states are emulating South Dakota’s economic nexus law in the wake of Wayfair; the less a state strays from the South Dakota model, the less likely it will be challenged.
While Virginia isn’t a member of the Streamlined Sales and Use Tax Agreement, it appears it will prohibit retroactive enforcement and provide safe harbor for small sellers. According to Finance Secretary Layne, Virginia’s small-seller exception could be different from South Dakota’s because Virginia is larger than South Dakota; this suggests the threshold could be higher than South Dakota’s $100,000 sales/200 transactions.
Property stored in Virginia triggers nexus
Virginia does currently require some remote sellers to collect and remit tax on their sales into the state. Effective June 1, 2017, out-of-state vendors that store property for sale in Virginia have nexus and an obligation to collect and remit Virginia sales and use tax. According to the Virginia Tax Commission, “The presence of the dealer’s inventory in the form of tangible personal property within the Commonwealth is sufficient to require the dealer to register for the collection the tax on the dealer’s sales to Virginia consumers.”
Although this doesn’t capture all remote sales, it does tax sales occurring through some online marketplaces. Vendors that sell to Virginia customers through the Amazon marketplace, for example, likely have goods stored in one or more of Amazon’s Virginia fulfillment centers. It will be interesting to see if and how Virginia’s upcoming remote sales tax law affects existing requirements.
Close to 30 states have adopted economic nexus in the wake of Wayfair. Learn how state economic nexus laws could impact your business.