In May 2015, The CPA Journal published “Developments in the Sales Tax of Electronic Commerce: Recent and Proposed Legislation in New York Sets the Agenda” (Corey Rosenthal, Patrick Duffany, and Scott Smith, http://bit.ly/2c7po3p), in which the authors discussed the rapidly changing landscape of use-tax collection in the United States. Since then, there have been even more changes. As of mid-March 2016, 15 states have introduced 35 state tax nexus bills to better enforce use-tax compliance (Liz Malm, “Update: What’s New in the World of Sales Tax Nexus Legislation?” Multistate Insider, Mar. 17, 2016, http://bit.ly/2cb28UH). Staying on top of these new and potential laws will help CPAs handle any compliance issues clients may have, and lead to new tax planning opportunities. This article provides a brief overview of several new and potential state and federal laws regarding use tax, as well as useful resources for CPAs and other tax preparers to keep informed on future changes.

Thank you for reading this post, don't forget to subscribe!

Alabama

Alabama now requires any remote seller with over $250,000 in annual sales in the state to collect use tax regardless of whether the business has any physical presence. This law appears to contradict the Supreme Court’s decision in Quill Corp v. North Dakota [504 U.S. 298 (1992)] and will undoubtedly be challenged in the courts. Nonetheless, CPAs with affected clients should check the Alabama Department of Revenue (http://revenue.alabama.gov/) for all official filing requirements.

A second, more specific, Alabama case related to “book nexus” is currently working its way through the courts [Scholastic Book Clubs, Inc. 2931 v. State Of Alabama Department Of Revenue, Ala. Tax Tribunal, Dkt. No. S. 14-374 (Mar. 25, 2016)]. Parents may be familiar with such school-distributed book catalogues as the Scholastic Reading Club flyer. Generally, teachers who distribute these catalogues receive no compensation from the book distributors. Nonetheless, Alabama has demanded sales and use tax collection from these distributors under the theory that the teacher is acting as an agent on their behalf. This case is still in early stages, but the state tax tribunal in Alabama has ruled in the state’s favor. Alabama’s Revenue Commissioner, Julie Magee, has taken a very aggressive stance on what constitutes nexus, and other states have followed her lead.

Colorado

In 2010, Colorado passed the Use Tax Notification Law, under which out-of-state sellers, also called non-collecting retailers, are required to provide information about sales and taxes to customers and the state. More specifically, noncollecting retailers that made, at a minimum, $100,000 of gross sales to Colorado customers in the prior year and expect to make at least this amount in the current year are required to 1) send a transactional notice to customers informing them that they are subject to Colorado use tax, 2) send an annual purchase summary to customers who purchase more than $500 worth of goods in a year, and 3) file an annual customer information report to the Colorado Department of Revenue.

In 2012, a federal district court struck down the law requiring out-of-state retailers to notify customers of Colorado’s use tax requirement and to report tax related information to customers and the Colorado Department of Revenue because it discriminated against out-of-state retailers and imposed undue burden to interstate commerce [Direct Marketing Association v. Huber, No. 1:10-cv-01546-REB-CBS. (D. Colo. Mar. 30, 2012)]. But after years of appeals reaching all the way to the Supreme Court, the notification requirement has been confirmed as the law in Colorado [see Direct Marketing Association v. Brohl, 575 U.S. ___ (2015), Direct Marketing Association v. Brohl, No. 12-1175 (10th Cir., Feb. 22, 2016)].

South Dakota

As of May 1, 2016, many remote retailers must collect and remit South Dakota sales and use tax per the enactment of the state’s Senate Bill 106, which establishes nexus for certain outof-state sellers that do business with South Dakota customers. The law stipulates that out-of-state sellers are considered to have sales tax nexus and therefore must collect and remit sales tax if they meet either of the following conditions: 1) their gross revenue from sales into the state exceeded $100,000 in the previous calendar year, or 2) they engaged in 200 or more separate transactions in the previous or current calendar year. It is likely that this law will be challenged in the courts. Nonetheless, it is important for tax preparers to stay current with the filing requirements.

Utah

Similar to Alabama and South Dakota, Utah’s pending bill, House Bill No. 235 (the Remote Transaction Parity Act) attempts to redefine nexus. The bill does not currently have a straight economic nexus test, but presumes sales tax nexus if, among other commonly accepted definitions, a remote seller utilizes an in-state affiliate to advertise, promote, facilitate, or solicit orders, or regularly engages in the delivery of sales in the state other than by a common carrier or United States mail. The bill does not, however, specify what constitutes a common carrier. Remote sellers with less than $50,000 sales in the state during the previous 12 months would be exempt from collecting and remitting Utah sales and use tax.

Other States

Louisiana, Minnesota, Ohio, and Oklahoma also have introduced bills similar to the one in Utah that prescribe new criteria for determining whether remote sellers have substantial nexus within the state and are therefore required to collect and remit use tax. More state updates on use tax nexus bills currently being considered can be found at https://www.multistate.com/insider.

Federal Updates

As of this publication, there are two sales and use tax bills in Congress, with a potential third on the way. The Marketplace Fairness Act of 2015 (S 698) is the latest version of a bill that passed the Senate in 2013 but subsequently died in committee in the House. It would stipulate that if a state is a member under the Streamlined Sales and Use Tax Agreement or meets simplified collection requirements, then it can require remote sellers to remit the use tax for sales in the state. Small businesses with annual gross receipts less than $1 million however, would be exempt.

A second bill, currently in the House, is the Remote Transactions Parity Act of 2015 (HR 2775). It is very similar to the Marketplace Fairness Act, but has two key differences:

  • The small seller exception changes for the first three years: $10 million in year one, $5 million in year two, and $1 million in year three.
  • There is an audit exception stating that if a business is registered and has annual gross receipts less than $5 million, then the state may not audit that business’s records unless there is reason to believe the business has engaged in “intentional misrepresentation or fraud.”

Lastly, Robert Goodlatte (R-VA), chairman of the House Judiciary Committee, has been discussing the proposal of a bill where the seller’s state would determine the tax base and the buyer’s state would determine the tax rate. Under such a plan, a business would collect the sales tax based on the rate determined by the buyer’s state and remit it to a national clearinghouse if the seller’s state taxes the item. No official bill has been introduced at the time of this writing. Nonetheless, CPAs should continue to monitor potential federal legislation, as things could change rapidly depending upon the outcome of the 2016 election.

Useful Resources for CPAs

Aside from the above-mentioned https://www.multistate.com/insider, two other websites can help CPAs stay abreast of the ever-changing state sales and use tax laws. The text and status of federal legislation making its way through Congress is available online (http://www.congress.gov). A quick search will turn up the current version of the bills discussed above, as well as where each stands in the legislative process.

Taxify is a software provider that aims to help companies comply with sales and use tax rules. Its website features a blog (http://taxify.co/blog) that constantly monitors the changing sales and use tax climate. Blog updates include how to comply with various laws in each state. Purchase is not required to view the blog, and Taxify also provides a bimonthly e-mail newsletter.

It can be extremely difficult to stay abreast of all the various use tax laws. Nonetheless, this knowledge not only can help CPAs and individuals maintain compliance, but also can potentially open up new tax planning opportunities.

Christopher R. Jones, PhD, CPA is an assistant professor of accounting at the University of Wisconsin Oshkosh.
Yuyun A. Sejati, PhD is an assistant professor of accounting at the University of Wisconsin Oshkosh.