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If you made a purchase on the internet yesterday, you might have noticed something different: sales tax. Changes in sales tax compliance laws for remote sellers and marketplace in more than a dozen states kicked in beginning October 1, 2019. More than 40 states have tweaked their sales tax laws since a 2018 Supreme Court Ruling.
That ruling in South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. – sometimes just referred to as Wayfair – focused on whether physical presence requirement for sales tax should stand. The idea that you could only impose sales tax on sales where a retailer maintained a physical presence in a state had previously been established in National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 and was affirmed in Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992). But the advent and growth of internet sales complicated the issue: when Quill was decided fewer than 2% of Americans had access to the internet. As states pushed to expand sales tax requirements to online sales, retailers pushed back. That led to what’s been called the “tax case of the millennium.” In Wayfair, the Supreme Court essentially killed Quill, ruling that states have broad authority to require online retailers to collect sales taxes.
(You can read more on Wayfair here. You can read the majority opinion, together with the concurring opinions and the dissent – which downloads as a PDF - here.)
Scott Peterson, Vice President of U.S. Tax Policy at the tax compliance software firm, Avalara, explains that the changes affect two targets: remote sellers and marketplace facilitators.
Remote sellers are precisely what they sound like on the tin: out-of-state sellers. As of October 1, 2019, the laws changed in seven states to require remote sellers to charge sales tax subject to specific criteria. They are:
- Arizona: Economic nexus and law kicks in with sales only threshold of starting at $200,000 in 2019; the threshold decreases over time to $150,000 in 2020 and $100,000 in 2021 and beyond)
- Kansas: Economic nexus law kicks in with no threshold (in other words, there’s no small seller exception)
- Massachusetts: Changes from cookie nexus (more on cookie nexus here and here) to full economic nexus with a $100,000 threshold
- Maryland: Economic nexus extended to certain tobacco taxes
- Minnesota: Economic threshold for remote sellers changed to $100,000 or 200 transactions (used to be ten or more retail sales totaling $10 or 100 transactions)
- Tennessee: Economic nexus threshold of $500,000 becomes effective; the optional uniform local rate of 2.25% goes away (specific local sales tax rate in effect for city or county jurisdiction into which the sale was shipped or delivered must be used)
- Texas: Economic nexus threshold of $500,000 becomes effective; there is also an option for single local use tax rate for sales in the state (as opposed to using the rate in each sales tax jurisdiction)
Marketplace facilitators are those consolidated sites like Amazon Marketplace, which make it possible for smaller retailers to reach a broad audience without the need for a separate sales platform. As of October 1, 2019, the laws changed in 14 states to require marketplace facilitators to charge sales tax, often subject to criteria. They are:
- Arizona: Marketplace facilitator law with a threshold of $100,000
- California: Marketplace facilitator law with a threshold of $500,000
- Colorado: Marketplace facilitator law with a threshold of $100,000
- Maine: Marketplace facilitator law with a threshold of $100,000 or 200 transactions
- Massachusetts: Marketplace facilitator law with a $100,000 threshold
- Maryland: Marketplace facilitator law has no dollar threshold but requires nexus
- Minnesota: Marketplace facilitator law with $100,000 or 200 transaction threshold
- Nevada: Marketplace facilitator law with $100,000 or 200 transaction threshold
- North Dakota: Marketplace facilitator law with $100,000 or 200 transaction threshold
- Ohio: Marketplace facilitator law with $100,000 or 200 transaction threshold
- Oklahoma: Marketplace facilitator law with $10,000 threshold (can collect or comply with use tax reporting requirements)
- Texas: Marketplace facilitator law has no dollar threshold
- Utah: Marketplace facilitator law with $100,000 or 200 transaction threshold
- Wisconsin: Marketplace facilitator law with $100,000 or 200 transaction threshold
With those changes, that means that of the 45 states that have a general sales tax, 43 have now adopted an economic nexus law or rule since Wayfair. According to Peterson, two states, Florida and Missouri, have general sales tax but no economic nexus – yet.
These changes, which feel like they are coming at a rapid-fire pace, can be challenging for retailers. Sellers need to figure out which laws affect them and that means accounting for sales by state (and in some states, tracking by jurisdiction). That can make tax compliance burdensome for some sellers, especially small-to-mid-sized businesses. This was a concern raised in Wayfair, which caused Justice Kennedy to note, “These issues are not before the Court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives States of vast revenues from major businesses.” [emphasis added]
Those words were considered as a signal that Wayfair, Part II, might eventually find its way into the courts. For now, sellers are considering other options. Some are pushing for more favorable legislation. Others, according to Peterson, are getting rid of their websites and selling directly on the marketplace since those larger companies tend to be better situated to collect and remit tax. Marketplace facilitators also get a little grace from the tax authorities: while remote sellers are expected to comply immediately, all states except one with marketplace facilitator laws allow up to three years to become 100% compliant (through phase-ins). The presumption, Peterson says, is that the marketplaces aren’t going to get it right.
So how do you know if you’re getting it right? Peterson suggests that sellers reach out to their tax professionals to make sure that you’re following the rules. If you use software, make sure that it’s tracking the right kinds of sales and in the right places. Ask questions, he says. Even those as basic as “What is a transaction?” can make a difference in whether you have to collect sales tax some states.