Remote Sellers – Beware
Written by Karen Poist, CPA
While all eyes have been on federal tax reform, the states are busy working on a tax reform of their own variety, one that is not so taxpayer friendly. The states believe that sales and use tax liabilities are under-reported and want to get those dollars. How do they plan to do this?
Well, until recently, the general rule for entities required to collect and remit sales tax has been a physical presence standard. A business had to have some sort of a physical presence in a state in order to have a sales tax collection and remittance requirement. The way business is done today is very different from just a few short years ago. As a result, the tried and true physical presence standard is being challenged. The physical presence standard has created a perceived benefit for “remote sellers,” or online sellers who don’t have a physical location in a state. Why should a consumer make purchases at a local store and be charged sales tax when they can order online and potentially not be assessed sales tax or voluntarily remit a use tax? It is estimated that consumers are making 51 percent of their purchases online. If a seller is not required to collect the sales tax, the consumer would have to report the purchases to their home state and pay use tax. (Use tax is the complement to sales tax.) Unreported consumer use tax is the main issue. States are working hard to capture this sales/use tax revenue. Some states are implementing a predetermined threshold where an online retailer is required to collect and remit sales tax to that state, referred to as an economic presence standard.
Many states are moving away from the physical presence standard toward this new economic presence standard. For example, in Indiana, Maine, North Dakota, Rhode Island, South Dakota and Wyoming, if a remote seller has $100,000 in state sales or greater than 200 separate transactions, they would be deemed to have sales tax nexus and the collection and remittance of sales tax would be required. In Alabama, the threshold is $250,000. Ohio and Tennessee have elected to have a higher $500,000 threshold.
Nebraska and Mississippi have also recently proposed similar remote seller legislation. It appears that with a newfound source of revenue, more states will explore similar sales tax laws. In addition to the actual collecting and remitting of sales tax, some states have also passed remote seller notice and reporting requirements. Remote sellers may be required to notify consumers that their purchases are subject to use tax in the state of the purchaser. In some states, the business is required to provide the information to the state department of revenue on an annual basis.
Colorado has multiple reporting requirements. First, the purchaser must be notified at the time of purchase (such as on the invoice) that use tax may be owed to Colorado. Second, an “annual purchase summary” must be sent to all customers with purchases over $500. The summary includes dates, amounts and categories of purchases. Finally, the remote seller is required to file a customer information report annually with the Colorado Department of Revenue, which includes customer name, address and total purchases. Alabama, Oklahoma, Vermont, Louisiana and Nebraska all have enacted or have proposed similar legislation.
Not so fast states. On September 13, 2017, the South Dakota Supreme Court ruled in favor of remote sellers on the issue of economic nexus. The court has deemed that the economic nexus laws being enacted are unconstitutional and directly violate the Commerce Clause. Therefore, a remote seller selling to customers located in South Dakota would not be required to collect and remit sales tax on behalf of South Dakota if they do not have a physical presence in the state. Stay tuned as it is expected that this will be challenged by the state of South Dakota.
Every business owner needs to be aware of these changes and should be proactive in determining the reporting thresholds and requirements for each state into which they are selling tangible goods. The BMSS SALT Services Group is available to assist with your sales tax needs. Please visit us at BMSS SALT Services or contact our office at (205) 982-5500.