Posted by Courtney Kopec, CPA
Recently, the states have signaled that their sales tax regulations for sellers of online goods will change yet again.
First, the window has closed on the Multistate Tax Commission Online Marketplace Seller Voluntary Disclosure Initiative’s offer for sales tax amnesty. Twenty-five states offered to waive all past tax, interest, and penalties for companies that agree to register for and collect sales tax for online sales going forward.
Second, South Dakota has filed a petition to have the Supreme Court overturn the landmark Quill case because the proliferation of internet sales has too much appetizing tax revenue on the table left uncollected by the states. And so going forward the states’ goal is to force out-of-state-sellers to collect sales tax by expanding the definition of nexus, data sharing, and enforcement which have been the factors that would allow states to compel taxpayers to comply.
When must I collect sales tax?
Taxing authorities require businesses to pay or collect tax based on nexus, which is their connection to the state. The 1992 Supreme Court case Quill Corp v North Dakota limited the burden of businesses required to collect sales tax to those with a physical presence: in general, an office, employee, salesperson, or inventory physically present in the state creates physical presence nexus. However, physical presence is just the starting point and not the only determining factor. The state’s narrow application of the physical presence test allowed for the creation of economic nexus that is generally triggered when a company has a purposeful direction of its business activities within a state rising to a substantial level.
New York State has been said to lead the way in proposed legislation defining economic nexus. In 2008, New York State amended the definition of vendor and created “click through nexus” (sometimes referred to as the “Amazon laws”) with the intention that large internet retailers with no physical presence in the state be required to collect sales tax if they pay commissions to in-state residents and gross receipts exceeded $10,000 during the preceding 12 months. Then in 2015 New York proposed that “marketplace providers” collect and pay New York State sales tax at the point of sale when the transaction takes place whether the actual seller is located within or outside the State. In October 2017, the state of South Dakota filed a petition for certiorari in the U.S. Supreme Court urging it to "abrogate Quill's sales-tax-only, physical-presence requirement." In its appeal South Dakota noted that advances in computer technology have made it easier to determine appropriate sales tax based on the purchaser's location and requiring such "poses a minimal obstacle." For a foreign seller of goods: “Tax treaties do not cover the taxing activities of the States” (1983 Supreme Court, Container Case). Therefore, because no international treaty provisions apply to sales tax, foreign sellers are subject to the same rules as domestic sellers.
Cover your bases
If you engage in internet sales and this is confusing to you, join the club. The statutes are evolving continually in reaction to the changing landscape of retail sales. However, the evolving concept of nexus may also apply to income and franchise tax, so being aware of and understanding the regulations is critical.
Another important thing to keep in mind is that when a transaction is complete, it is impossible to go back later and collect sales tax for which the taxpayer may be responsible. Under audit, what should have been a tax collection process becomes an expense to the seller.
The analysis and interpretation of these changing laws is challenging. If your business has transactions out-of-state and you would like to review whether your business has compliance requirements in another state, contact your CPA or trusted advisor to review the latest guidelines.