On October 5, New Jersey Governor Phil Murphy signed sales tax legislation that significantly expands who is required to collect and remit New Jersey sales tax. This article will summarize the key aspects of this legislation so that CPAs can properly advise multistate businesses accordingly.
Under the new law (A-4496), New Jersey has joined the rapidly growing ranks of states enacting “economic nexus rules” in the wake of June’s landmark U.S. Supreme Court ruling in South Dakota v. Wayfair. In addition to requiring that “remote sellers” collect and remit New Jersey sales tax—provided certain minimum connections exist—the new law also expands New Jersey’s sales tax nexus rules by imposing collection and remittance obligations on “marketplace facilitators.”
Economic Nexus for New Jersey’s Sales Tax
In Wayfair, the Court overturned decades of precedent, reversing its prior decision in Quill Corp. v. North Dakota and abandoning its longstanding bright-line physical presence requirement for the imposition of tax collection responsibilities on out-of-state retailers. Based on the holding in Wayfair, a mere economic presence within a state, as opposed to a physical presence, is sufficient to justify taxation, provided certain minimum connections exist in the state seeking to impose the collection requirement.
The New Jersey statute tracks the South Dakota statute that was upheld by the Supreme Court in Wayfair. Under this law, a remote seller (i.e., one lacking in-state physical presence) is now required to register, collect, and remit New Jersey sales tax if 1) the remote seller’s gross revenue from delivery of tangible personal property, specified digital products, or services 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 for delivery into New Jersey in 200 or more separate transactions during the current or prior calendar year.
Supporters of the law have argued that expanding the sales tax nexus rule will level the playing field between in-state retailers (historically the only retailers required to collect tax), expanding the collection and reporting obligation to include out-of-state retailers who had historically escaped taxation under the old rules. The new law took effect on November 1, and will be applied prospectively.
In addition to taxing remote sellers, the new law also imposes sales tax collection obligations upon online “marketplace facilitators,” such as Amazon, eBay, or Etsy. Generally, marketplace facilitators are businesses that create a marketplace within which buyers and sellers transact business, but that may not be the party actually making the retail sale (i.e., the entity facilitates the sale between the buyer and the seller). If the facilitated sale is subject to sales tax, the question has arisen as to who should be required to collect the tax from the buyer: the remote seller or the marketplace facilitator itself. Various states have chosen different answers, but increasingly states have begun to impose tax collection obligations directly upon marketplace facilitators.
Under the new law, New Jersey has chosen to impose the tax collection responsibilities upon marketplace facilitators. This provision of the law also took effect on November 1; however, in order to ensure accurate and timely collection of taxes due, the New Jersey Division of Taxation has discretion to suspend these requirements for a period not to exceed 180 days.
A Changing Environment
Nationally, the sales tax nexus rules are rapidly changing, and New Jersey is not unique in its approach. CPAs who advise companies that conduct business in New Jersey or have New Jersey customers need to analyze the impact of these provisions and properly adjust their business processes. Of note, the new law applies to more than just traditional online retailers; it also imposes sales tax collection obligations on taxpayers who facilitate, but do not actually make, the retail sale.
CPAs advising businesses that are retailers and marketplace facilitators should advise these entities to immediately undertake an inventory of products and services being sold into New Jersey to determine whether they need to register, collect, and remit New Jersey sales tax. In addition, CPAs should be cognizant of various states’ economic nexus rules when determining compliance obligations. Lastly, CPAs should keep in mind that sales taxes are “trust fund taxes” and as such often entail personal liability for key owners, operators, and managers if they are not paid. Businesses and their advisors need to comply with sales tax collection and reporting rules, because the stakes for noncompliance have never been greater.