On October 3, 2016 the Council on State Taxation and the National Federation of Independent Business Small Business Legal Center filed an amicus brief with the U.S. Supreme Court requesting the court review a decision from the 10th Circuit Court of Appeals regarding the remote seller reporting law enacted in Colorado (DMA vs Brohl).
As we previously reported in this blog, the 10th Circuit upheld a law requiring businesses selling into Colorado, but not collecting the state sales tax, to send notices to all Colorado purchasers of their obligations to pay use tax, plus an annual list of all their purchases in the state. In addition, sellers must send an annual report to the Department of Revenue listing such purchases.
What is going on?
This filing in the Colorado case is the most recent move in the continuing efforts by states to capture sales tax revenue on remote commerce.
Because states are currently prohibited from requiring those without a physical location to collect and remit sales tax, they have turned to exploring other avenues to capture this lost tax revenue. One such approach can be seen in the Colorado reporting law. Colorado hopes that the customer notice will encourage individual customers to self-assess and remit tax. If they fail to do so, the annual DOR notice will give Colorado enough information to assess individual consumers directly.
Five states have enacted similar notification laws, which require sellers not collecting tax in a jurisdiction to notify purchasers of their obligations to remit use tax:
- Louisiana – Effective 7/1/2017
- Oklahoma – Effective 11/1/2017
- South Dakota
- Vermont – Effective 7/1/2017 or sooner
Amazon recently notified its marketplace sellers that the state of New York requested information on in-state sales by Amazon sellers. The notice indicated that Amazon intended to comply by providing transactional details for those businesses that have a New York address and also use their tax calculation services. New York has yet to implement a reporting law similar to Colorado’s, but the Amazon notice suggests that the state is looking for similar information.
Two states have taken even more aggressive approaches and implemented laws that impose an economic nexus standard:
- South Dakota – (Read more about South Dakota’s changes.)
Both have laws in place requiring sellers — regardless of physical presence — who cross certain dollar threshold in sales to collect and remit sales taxes into those states. Both of those laws are also being challenged in the courts.
Other states seem to be following suit: Both Tennessee and Vermont have enacted similar rules. The Tennessee requirement is expected to go into effect on January 1, 2017 and the Vermont requirement will apply once the Supreme Court renders a final decision.
What does this all mean for sellers?
The Colorado, Alabama, and South Dakota cases are still being processed by the courts and do not have definitive outcomes as of yet. In addition, there are multiple bills at the federal level that are pending action that attempt to address this issue as well.
As we wait for clarity on the issue over remote sales and the obligations of sellers without nexus, states will continue to assess their options and search for creative ways to increase tax collections, unless and until there is clear guidance from the courts or Congress.
These issues are not confined to the U.S. — many countries are also adapting or changing their laws on how and when remote sellers must register and collect VAT.
With declining sales tax revenues, we can expect states to search for creative ways to increase tax collections unless and until there is clear guidance from the courts or Congress.
What to do now
One thing that is clear is that the longstanding rule regarding physical presence in a jurisdiction is in jeopardy. As the digital economy grows and the tax gap widens, the argument for legislative or judicial action becomes stronger and more feasible.
While we wait for decisions from the courts and legislation by congress, here are some actions you can take in the meantime:
If you are selling into jurisdictions where you are not registered to collect sales tax, you should be prepared for the distinct possibility that either a notice or collection requirement may apply to you in the near future. To be ready you should review your systems and information to determine:
- Where are you currently registered for sales tax?
- What products/services do you sell?
- What jurisdictions are you selling into?
- What information do you retain on your customers and sales?
- Customer Name
- Billing address
- Shipping address
- Total amount spent on purchases
- Can you create reports on this information easily?
- If you sell through a marketplace, can your marketplace provider easily provide the needed information?
- Can you, or do you, alert your customers of the potential obligation to self-assess any taxes you don’t collect?
- Do you have systems in place to provide this information to both your purchasers and the states?
We will continue to update this blog as these issues evolve, but you should take these simple steps now to prepare for these impending changes.