On August 7, 2018, the North Carolina Department of Revenue issued a Directive (SD-18-6) requiring remote sellers to begin collecting North Carolina sales tax on sales of goods and services to North Carolina customers. The Directive is a response to the United States Supreme Court’s ruling in South Dakota v. Wayfair, Inc., which eliminated the safe harbor for remote sellers without a physical presence in the taxing state.
For more than half a century, the Supreme Court’s decisions in National Bellas Hess v. Illinois and Quill Corp. v. North Dakota protected remote sellers from sales and use tax collection responsibility in jurisdictions where they had no physical presence. These decisions were based on the premise that requiring remote sellers with no physical presence to collect sales and use taxes violated the Commerce Clause of the federal Constitution by placing an undue burden on interstate commerce.
In a direct challenge to these older decisions, South Dakota enacted a statute requiring remote sellers to collect sales tax on sales to in-state customers if the retailer had more than $100,000 in sales into the state or more than 200 sales to in-state customers during the current or previous calendar year. Overruling its prior decisions, the Supreme Court found that the South Dakota statute did not unduly burden interstate commerce at least as applied to “large, national companies” with an “extensive virtual presence” in South Dakota.
In reaching this conclusion, the Court specifically noted three factors that limited the burdens South Dakota imposed on interstate commerce: (1) the $100,000/200 transaction threshold would shield smaller retailers from compliance obligations, (2) the statute applied only prospectively, and (3) South Dakota was a member of the Streamlined Sales and Use Tax Agreement, a multistate agreement that attempts to standardize sales taxes to reduce administrative and compliance costs.
For a discussion of the Wayfair decision, see the June 26 Tax Alert.
North Carolina’s Remote Seller Statute
Approximately eighteen states have adopted remote seller statutes with dollar and transaction thresholds similar to South Dakota’s. North Carolina has not. However, North Carolina has long had on its books a remote seller statute that, in its current formulation, purports to impose sales and use tax collection responsibility on any remote seller that “purposefully or systematically exploit[s] the market provided by this State by any media-assisted, media-facilitated, or media-solicited means” if those activities “create nexus” with the state. Of course, during the Bellas Hess and Quill era, such activities did not create nexus in the absence of physical presence, and the statute was largely held in abeyance.
Many states are likely to respond to Wayfair by enacting remote seller statutes that, like South Dakota’s, include objective thresholds, non-retroactivity provisions and other protections that limit compliance burdens to a constitutionally acceptable level. Before Wayfair was decided, the North Carolina General Assembly considered, but did not pass, a statute similar to the South Dakota remote seller statute. The legislature might be expected to take up a similar bill in a future session now that the case has been decided. However, the Department of Revenue has decided not to wait on future legislative action. Instead, by issuing the new Directive, the Department is attempting to immediately vivify North Carolina’s existing remote seller statute within the limits blessed by the Supreme Court in Wayfair.
Specifically, the Directive announces that the Department will require remote sellers with more than $100,000 in North Carolina gross sales or more than 200 separate North Carolina transactions during the current or previous calendar year to register, collect and remit North Carolina sales and use taxes beginning on the later of November 1, 2018 or 60 days after meeting the threshold. These enforcement actions will be prospective only. Thus, a remote seller with no physical presence in North Carolina but that satisfies the new threshold is subject to compliance going forward but is shielded from retroactive enforcement.
Remote sellers whose activity in North Carolina falls below the threshold may, of course, voluntarily register and begin collecting and remitting tax.
North Carolina, like South Dakota, is a member of the Streamlined Sales and Use Tax Agreement, and, by adopting the same objective threshold as the South Dakota statute and foregoing retroactive enforcement, the Directive attempts to satisfy the compliance burden limitations relied upon in Wayfair.
The Directive does not apply to all remote sellers. Specifically, it does not apply to (1) remote sellers already registered with the Department to collect and remit sales and use taxes or (2) remote sellers with a physical presence in North Carolina “or other legal obligation to collect and remit North Carolina sales and use taxes.” These taxpayers are not entitled to the benefits of prospective-only application of the compliance requirements or the objective threshold.
For example, a remote seller that does not satisfy the threshold but that has even a small physical presence in the state is subject to sales and use tax collection responsibility on both a retroactive and prospective basis. In other words, a seller with a small physical presence in the state who has not registered to collect North Carolina sales taxes remains at risk for prior periods even if its sales do not meet the threshold amounts.
Similarly, a remote seller that does not satisfy the threshold and that has no physical presence in North Carolina but that is already registered as a retailer with the Department is liable to both retroactive and prospective application of the remote seller statute. Such a seller cannot cease collecting North Carolina sales tax even if its sales are below the threshold amount.
The Department has expressed its intention to issue additional guidance in the form of a FAQ to be released by the end of August. Some items that may be addressed in the FAQ include:
Application of the Directive to non-US remote sellers.
What constitutes a “separate transaction” for purposes of administering the threshold.
Whether a remote seller who exceeds the threshold and therefore registers and collects North Carolina sales tax can suspend compliance in future years when it does not exceed the threshold.
Whether any accommodation will be extended to small remote sellers who exceed the threshold.
Whether sales before November 1, 2018 will be considered in determining whether the threshold has been satisfied.
How the Directive’s relief from the possibility of retroactive enforcement will be applied to taxpayers currently under audit.
Whether the Department will seek to codify the Directive in future legislation or an Administrative Rule.
North Carolina’s remote seller statute is obviously much broader than the South Dakota statute considered in Wayfair and would almost certainly be considered unconstitutional under that decision if enforced against all remote sellers. The Directive is an attempt by the Department to enforce the existing statute within the limits condoned by the Wayfair decision.
This raises two interesting questions. First, has the Department accurately interpreted Wayfair? The Department is entitled to some sympathy, as parsing the Court’s Commerce Clause decisions is no easy task. However, it is relatively clear that Wayfair did not expressly hold that the South Dakota statute was constitutional as applied to all remote sellers. It appears essential to the Court’s decision that the taxpayers in question were “large, national companies” with an “extensive virtual presence” in the state. Whether the statute would be constitutional when applied to smaller taxpayers that satisfy the statutory threshold is an unanswered question. It is also not clear whether the state can constitutionally require compliance by retailers that do not meet the threshold simply because they have some small physical presence in the state.
A second, related question is whether the Directive is entitled to a presumption of correctness. The Secretary of Revenue is authorized to “interpret all laws administered by the Secretary,” and his interpretations are prima facie correct. However, the Directive is not really an interpretation of North Carolina’s remote seller law. It is instead a decision to enforce the law to the extent permitted by the United States Constitution. The only interpretation involved is an interpretation of the federal Constitution as elucidated by the Supreme Court. This is not part of the law “administered by the Secretary.” Taxpayers that run afoul of the Directive and choose to litigate should be able to argue that the Directive is not entitled to any special deference.
 N.C. Gen. Stat. §105-164.8(b)(5).
 N.C. Gen. Stat. §105-264(a).