CPAs should be aware of current developments in various states with regard to sales and use taxes in order to properly advise companies doing business in multiple jurisdictions. This article provides an overview of the use tax notice and reporting requirements that states have begun to adopt, which are applicable to out-of-state vendors with no physical presence in the state.
Use Tax Notice and Reporting Requirements for Out-of-State Vendors
A number of states have enacted laws imposing use tax notice and reporting requirements on out-of-state vendors that do not have nexus for sales tax purposes. While such out-of-state vendors are not required to collect and remit sales and use taxes, these vendors may nonetheless be required to provide notice on their websites, invoices, and receipts that in-state customers are required to remit use tax on their purchases, and to provide a yearly report of purchases to those customers and—in some states—to the state tax authorities. The exact requirements vary and can be burdensome.
As of July 6, 2017, eight states have enacted statutes imposing use tax notice or reporting requirements on out-of-state vendors, as seen in the Exhibit.
States with New Notice or Reporting Requirements in 2017
Colorado’s Notice and Reporting Requirements
An example of “notice” reporting is Colorado, which imposes both a notice requirement to the customer at the time of sale and annual customer and state reporting requirements. Pursuant to the Colorado statute, an out-of-state vendor is required to provide the following notice and reports:
- Customer notice requirement (made at the time of sale): The seller must state that the seller does not collect Colorado sales or use tax, the customer’s purchase is not exempt from Colorado sales or use tax merely because the purchase was made over the Internet or by other remote means, and the customer is required to file a Colorado sales or use tax return at the end of the year to report all taxable purchases on which Colorado sales or use tax was not paid and to pay such tax. The notice must be easily seen and located near the stated purchase price.
- Annual seller reporting requirement to customers with purchases of $500 or more (due by January 31, 2018): The seller must provide an annual invoice to its Colorado buyers summarizing the dates of purchase and describing the items purchased and the sales price of such items, and stating that the seller is required by law to provide the Colorado Department of Revenue (DOR) with the above information and to file a Colorado sales or use tax return at the end of the year to report all taxable purchases on which Colorado sales or use tax was not paid and to pay such tax. The above information must be sent by January 31, 2018, via first class mail to the customer’s last known address in an envelope marked “Important Tax Document Enclosed.”
- Annual seller reporting requirements to the state (due by March 1, 2018): The out-of-state retailer is required to provide the DOR with a detailed list of all of its Colorado customers, including the name, billing and shipping address, and total dollar amount of Colorado purchases made by each such customer; and where the seller’s Colorado sales are greater than $100,000 during the prior calendar year, this information must be provided electronically.
If the out-of-state retailer’s gross sales to Colorado customers in the prior year were less than $100,000 and are reasonably expected to be less than $100,000 in the current year, the retailer is exempt from the notice requirement.
There are a number of potential penalties if a retailer does not comply with each of the above reporting rules.
Connecticut and Reporting Requests
Connecticut is not included in the Exhibit; however, pursuant to authority granted by statute, the Connecticut Department of Revenue Services (DRS) recently began sending requests to some out-of-state retailers requesting that such retailers either provide detailed information about their Connecticut customers or voluntarily register to collect and remit Connecticut sales and use taxes. The requests issued by the DRS do not require any type of notice or reporting to customers, but do require out-of-state retailers to provide electronic files identifying Connecticut customers and such customers’ Connecticut purchases. This approach is somewhat different than the approaches in other states, because it does not require a class of out-of-state sellers to file reports with the DRS and it gives the DRS the ability to determine whether any particular customer of such out-of-state sellers is paying the sales or use tax due.
The notice and reporting rules apply to all “remote sales,” not just to sales over the Internet. These rules vary by state, and compliance can be time consuming and expensive. Noncompliance, however, can result in significant penalties. All businesses not collecting sales tax on their remote sales into other states should ensure that they understand how these rules can impact their businesses and, depending on the requirements in a particular state and the cost of compliance, begin collecting and remitting the necessary sales tax in one or more of the relevant states.
It is anticipated that a growing number of states will implement similar use tax notice and reporting requirements on a prospective basis. CPAs need to be aware of these requirements in order to properly advise their multistate clients.