On June 21, 2018, the United States Supreme Court decided South Dakota v. Wayfair Inc., et al., which upheld South Dakota’s economic nexus law allowing the state to impose sales tax upon online retailers who sell goods into South Dakota but do not have a physical nexus with that state – i.e., property or employees in the state. In doing this, the Supreme Court overruled the physical presence requirement set forth in Quill Corporation v. North Dakota in 1992.
Generally, economic nexus laws require these “remote sellers” to collect and remit sales tax once the seller meets a set level of sales transactions or gross receipts activity (a threshold) within the state. Specifically, South Dakota’s law requires a remote seller to begin collecting and remitting sales tax once the seller’s gross revenue from the sale of tangible personal property, product transferred electronically or services delivered into South Dakota exceeds $100,000; or if such sales, electronic product transfers or services delivered into South Dakota involve 200 or more separate transactions.
Since Wayfair, a majority of U.S. states have followed South Dakota and adopted similar economic nexus laws with the same thresholds. Several states have begun enforcing previously enacted laws similar to that of South Dakota’s which were unenforceable prior to the Supreme Court’s holding in Wayfair due to the physical nexus requirement under Quill. To date, there are only twelve states that have not yet adopted economic nexus laws, five of which – Alaska, Delaware, Montana, New Hampshire and Oregon – do not impose a state sales tax at all. The remaining seven states cannot adopt Wayfair compliant laws until their respective legislatures reconvene. A summary of certain economic nexus laws in states where White and Williams has offices is as follows:
Beginning July 1, 2019, sellers making more than $100,000 in sales into Pennsylvania in the previous twelve-month period must register for a license, and collect, report and remit sales tax to the Commonwealth. Note, remote sellers who fall below this sales threshold, but exceed $10,000 in sales, must either comply with specific notice and reporting requirements set forth under PA Act 43 or elect to remit sales tax.
For sales made on and after November 1, 2018, a remote seller must register, collect and remit New Jersey sales tax if the remote seller meets either of the following criteria: 1) the remote seller’s gross revenue from sales of tangible personal property, specified digital products, or services delivered into New Jersey during the current or prior calendar year exceeds $100,000; or 2) the remote seller sold tangible personal property, specified digital products or services delivered into New Jersey in 200 or more separate transactions during the current or prior calendar year. Fortunately for businesses, New Jersey is a member of the Streamlined Sales and Use Tax Agreement (SSUTA), which makes it less administratively burdensome for remote sellers to comply, especially if the seller has already completed the Streamlined Sales and Use Tax registration form for other SSUTA states.
A remote seller must register, collect and remit New York sales tax if the seller has made more than $300,000 in sales of tangible personal property delivered into the state and has conducted more than 100 sales of tangible personal property delivered into the state in the immediately preceding four sales tax quarters. Interestingly, when New York’s Department of Taxation and Finance issued Notice N-19-1 earlier this year, it did not set a specific effective date; however, said Notice did state that certain existing provisions in the New York State Tax Law immediately became effective due to Wayfair.
As mentioned above, Delaware is one of the five U.S. states that does not impose a state sales tax.
An online vendor with a principal place of business located outside Massachusetts and not otherwise subject to tax is required to register, collect and remit Massachusetts sales or use tax if, during the prior twelve-month period, it had more than $500,000 in Massachusetts sales from transactions completed over the internet and made sales resulting in a delivery into the state in 100 or more transactions. Note, this regulation became effective October 1, 2017 and the Massachusetts’ Department of Revenue is enforcing it for all tax periods both prior to and subsequent to Wayfair. For this reason, litigation is currently pending in Massachusetts.
All non-collecting retailers (i.e., remote sellers) who, in the previous calendar year, have made $100,000 or more in gross revenue from sales into Rhode Island or 200 or more transactions into Rhode Island must either register, collect and remit sales or use tax to Rhode Island or comply with various statutory notice requirements. Like New Jersey, Rhode Island is also a member of the SSUTA, which again makes it less administratively burdensome for remote sellers to register and collect sales tax.
Given this emerging area of tax law, enforcement of individual economic nexus laws by each state and consequences for failing to comply remain relatively unknown. One could imagine that a remote seller’s failure to collect and remit sales tax (once economic nexus has been established) would likely subject the seller to audit, which could ultimately result in the assessment of penalties and interest. Unfortunately, very few states are offering a grace period for compliance, but they exist nonetheless. For example, Colorado’s law became effective December 1, 2018, with a grace period through May 31, 2019 to ensure remote sellers have sufficient time to make the required changes. Therefore, remote sellers are encouraged to review each state’s economic nexus law carefully to determine if sales tax registration is required, and to contact a tax professional to ensure proper compliance if necessary.