One of the major state and local tax developments that CPAs have been dealing with is the Supreme Court’s decision on June 21, 2018, in South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018), and the sales tax economic nexus implications related to it. In a 5-4 decision, the Court found in favor of the state of South Dakota, expanding the definition of in-state nexus to include a “virtual presence.” This landmark decision has created a profound impact on state and local sales tax administration and, in turn, states’ authority to require sales and use tax registration and collection for out-of-state companies that do not have any physical presence within a specific jurisdiction.
Prior to the decision, the following 11 states had enacted legislation that expanded their respective definitions of nexus: Hawaii, Kentucky, Maine, Massachusetts, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, Tennessee, and Vermont. Apart from Tennessee, whose law is currently stayed pending litigation, some of these state rules were enforceable upon enactment—specifically, Massachusetts, Ohio, Pennsylvania, and Rhode Island. New York recently issued an administrative pronouncement indicating its rule became enforceable as of June 21, 2018, upon the delivery of the Wayfair decision, while four more states’ rules—Hawaii, Maine, Oklahoma, and Vermont—became enforceable on July 1, 2018. Kentucky’s was originally slated to begin on July 1, 2018; however, the state decided to extend enforcement to begin on October 1, 2018.
Since the Supreme Court’s decision, many states, and also the District of Columbia, have enacted legislation similar to South Dakota’s rule, which requires an out-of-state or remote seller to register and begin collecting sales/use tax if its gross sales in the current or preceding year exceed $100,000, or it has 200+ sales transactions delivered into the state during the current or preceding year. Forty-five states and the District of Columbia impose a statewide sales/use tax; of these 46 jurisdictions, 36 states have begun enforcing their rules, with California and Texas to begin on April 1, 2019, and October 1, 2019, respectively. Six more states—Arizona, Arkansas, Kansas, Missouri, New Mexico, and Virginia—have introduced similar legislation that is likely to pass and become enforceable on or by January 1, 2020. Currently, neither Florida nor Idaho has any pending legislation.
In addition to the new economic nexus thresholds, out-of-state remote and Internet sellers need to be cognizant of other rules with regard to electronic cookies, election and notice reporting requirements, and sales by marketplace facilitators.
Electronic Cookies
Massachusetts established a new bright-line sales tax economic nexus standard for Internet vendors transacting business in Massachusetts, effective July 1, 2017. In this regard, Internet vendors have sales tax nexus in Massachusetts if they—
- have property interests in or the use of in-state software (e.g., apps) and ancillary data (e.g., site cookies) that are distributed to or stored on the computers or other physical communications devices of their in-state customers and may enable their use of such physical devices; and
- for the six-month period of July 1, 2017 to December 31, 2017, had more than $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions during the period of July 1, 2016 to June 30, 2017; or
- for calendar years beginning in 2018 and thereafter, had more than $500,000 of Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions during the preceding calendar year.
Per the Massachusetts Department of Revenue, modern-day Internet vendors and businesses “may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term.” Mobile apps downloaded and used by customers on their communication devices enhance and even facilitate in-state sales by implementing web-based shopping carts, permitting customers to compare products and evaluate product reviews, and tracking customer preferences and locations. While Internet cookies or text data files are not actually software, the use of cookies also enhances and facilitates an internet vendor’s sales by allowing customers to readily log into their accounts and store items in a shopping cart. Cookies also track behavior over time and target specific ads to each customer, thereby resulting in “in-state business activity by such vendor.”
The validity of the Massachusetts rule is currently being challenged by a Virginia-based online retailer in the circuit court for Albemarle County on the grounds that the rule violates the commerce clause of the U.S. Constitution and the physical presence “substantial nexus” standard set out by the Supreme Court in Quill Corp. v. North Dakota (Crutchfield Corp. v. Harding, Va. Cir. Ct., No. CL17001145-00, 10/24/17). In addition to Crutchfield, several other out-of-state remote sellers and online retailers are also challenging the Massachusetts cookies rule.
Ohio passed similar legislation, which has been in effect since January 1, 2018. In Ohio, an out-of-state Internet vendor establishes nexus with the state by using in-state software and having over $500,000 in gross sales during the current or preceding calendar year through in-state software (Ohio Revised Code Annotated section 5741.01). At the end of 2017, the American Catalog Mailers Association (ACMA) filed a challenge to the rule (American Catalog Mailers Ass’n v. Testa, Franklin City, Ohio Ct. Com. Pl., No. 17 CV 11440, 12/29/17). In December 2018, however, ACMA voluntarily withdrew its challenge.
In addition, both Rhode Island and Iowa modified their definitions of sales and seller to also include the use of “in-state” software to make sales. Rhode Island issued a notice on August 4, 2017, that provided details regarding the new laws Governor Gina Raimondo signed as part of appropriations bill H.B. 5175. The legislation not only enacted a nexus threshold like South Dakota’s rule, but also defined “noncollecting retailers” as retailers who “use in-state software to make sales at retail of taxable goods/services” [R.I. Code section 44-189.2-2(4)(A); see also Notice 2017.09, Rhode Island Division of Taxation, Aug. 4, 2017]. In Rhode Island, “in-state software” means software used by in-state customers on their computers, smartphones, and other electronic or communication devices, including information or software such as cached files, cached software, cookies, or other data tracking tools that are stored on property in the state or distributed within the state, for the purpose of purchasing tangible personal property, prewritten computer software delivered electronically or by load and leave, or taxable services [R.I. Code section 44-18.2-2(3)].
Since the Supreme Court’ decision, many states have enacted legislation similar to South Dakota’s rule.
In Iowa, Governor Kim Reynolds signed legislation, effective January 1, 2019, that enacted economic sales thresholds similar to those in South Dakota’s rule. In addition, the legislation redefined a retailer to include “retail[ers] who own, license, or use software or data files that are installed or stored on property used in Iowa … [and retailers who] use in-state software to make Iowa sales.” The revised statute also defines software or data files as “software that is affirmatively downloaded by a user … downloaded as a result of the use of a website, preloaded software, and cookies” [Iowa Code section 423.14A.3.c.(1)]. “In-state software” means computer software installed or stored on property located in Iowa or that is distributed within Iowa to facilitate a sale by the retailer [Iowa Code section 432.14A.3.c.(2)].
‘Election’ and ‘Notice Reporting’ States
Prior to Wayfair, at least 11 states had election or notice reporting requirements, meaning that if an out-of-state remote or Internet seller had gross sales exceeding a certain dollar threshold in the current or prior year, it had to either provide notice to its customers (typically on the face of the invoice) that use tax may be due, provide an annual summary to each customer with the same language, and provide annual information to the state’s tax department or voluntarily register and start collecting tax. Since Wayfair, Connecticut, Georgia, and Iowa have enacted legislation that allows the out-of-state remote or Internet seller to either elect whether it will provide notice to its customers and to the states regarding its sales or elect to register and begin collecting and remitting the sales/use tax due. It is crucial to emphasize that failure to comply with the election or notice and reporting requirements could result in additional fees and penalties due to each state.
Marketplace Facilitators
In addition to states enacting legislation to address remote and Internet sellers, states are also introducing and enacting legislation concerning sales by marketplace facilitators, such as Amazon or Etsy. If an online marketplace operates its business in a state and provides e-commerce infrastructure as well as customer service, payment processing services, and marketing, it is a marketplace facilitator and is required to register, collect, and remit tax on behalf of the third-party sellers. The third-party sellers may be required to report their marketplace sales in their gross sales but deduct them as marketplace sales. Many states began developing marketplace facilitator rules and policies or enacted legislation simultaneously with their development of the various Wayfair nexus thresholds.
The following states currently require marketplace facilitators to register and collect, and remit sales and use tax:
- Alabama: January 1, 2019
- Connecticut: December 1, 2018
- Iowa: January 1, 2019
- Massachusetts: September 22, 2017
- Minnesota: October 1, 2018
- New Jersey: November 1, 2018
- Oklahoma: July 1, 2018
- Pennsylvania: April 1, 2018
- South Dakota: March 1, 2019
- Washington: October 1, 2018
- Wyoming: July 1, 2019.
In addition, the following states have introduced marketplace facilitator legislation:
- Arizona: September 20, 2016 (see TPR-16-3, Arizona Transaction Privilege Tax Ruling, AZ DOR 9/20/2016; H.B. 2702, introduced on 2/13/2019)
- California: introduced December 14, 2018, and amended on February 14, 2019 (Assembly Bill 147)
- District of Columbia: April 1, 2019 (enforcement depends on approval of the mayor)
- Georgia: February 12, 2019 (House Bill 276)
- Hawaii: January 18, 2019 (H.B. 113 and S.B. 396)
- Indiana: January 14, 2019 (2019 IN H 1352)
- Kansas: February 14, 2018 (H.B. 2352)
- Maryland: February 14, 2019 (2019 MD H 1301)
- Missouri: February 12, 2019 (2019 MO H 908)
- Nebraska: January 15, 2019 (2019 NE L 291)
- North Dakota: January 21, 2019 (2019 ND S 2338)
- Rhode Island: February 7, 2019 (2019 RI S 251)
- South Carolina: prefiled on December 12, 2012; introduced on January 8, 2019; amended January 29, 2019 (2019 SC S 214)
- Utah: February 13, 2019 (2019 UT S 168)
- Vermont: January 29, 2019 (2019 H. 117)
- Virginia: January 18, 2019 (2018 VA H 2801)
- West Virginia: February 1, 2019 (2019 WV H 2813).
Over the next few months, a stream of additional guidance will flow from the states based upon how they expect the Wayfairdecision to be applied within their respective jurisdictions. CPAs need to be aware of these rules as they conduct potential nexus study analyses to determine a company’s state and local sales tax compliance obligations.
