In 2017 expect a surge in the number of sales tax reporting laws being enacted throughout the United States. States are looking for ways to combat significant losses of tax revenue from e-commerce transactions. Two hot button topics will be common throughout 2017 for states—seller notice requirements and economic nexus.
In 2010 the state of Colorado enacted legislation to improve the collection of use taxes when out-of-state retailers with no physical presence in Colorado sold to end user customers in Colorado. Colorado’s law requires non-collecting retailers to:
- Send a “transactional notice” to purchasers informing them they may be subject to Colorado use tax.
- Send an annual purchase summary to customers who purchase more than $500 worth of taxable property in a year, including dates and amounts along with a reminder they may be subject to Colorado use tax.
- File an annual information report with the Colorado Department of Revenue.
Colorado’s law exempts reporting requirements for retailers that made less than $100,000 of gross sales to Colorado in the previous year and reasonably expect to make less than that amount in the current year.
Litigation involving Direct Marketing Association ensued shortly after this legislation was passed in 2010. On December 13, 2016, the U.S. Supreme Court declined to hear Direct Marketing Association’s appeal of the U.S. Court of Appeals for the 10th Circuit’s decision upholding Colorado’s law on February 22, 2016. What is important to understand is that in the February 22, 2016, decision the U.S. Court of Appeals for the 10th Circuit determined the physical presence nexus requirement stated by the U.S. Supreme Court in Quill v. North Dakota is narrowly limited to sales and use tax collection and therefore does not apply to information reporting requirements like those imposed by Colorado.
Now that this issue is final, expect to see more states enacting similar notice-reporting legislation in 2017!
In 2016 we saw a number of states, either by legislation or by regulation, enact economic nexus standards when it comes to filing sales tax returns for remote sellers that otherwise lack a physical presence in a state. Economic nexus standards are a way for states to directly challenge the physical presence standard adopted in the Quill Corporation case from 1992. Economic nexus standards generally focus on levels of sales activity in a state that force remote sellers to file sales tax returns even if they had “no physical presence.” States that have adopted economic nexus standards include South Dakota, Alabama, Tennessee, and Vermont. Litigation challenging the economic nexus standards set forth in Alabama and South Dakota is already in place, in the hope that one of these cases will make its way to the U.S Supreme Court with a different end result—overturning Quill! Over the years various pieces of legislation have been introduced at the federal level in the hope that it would give the states more power to require remote sellers to collect and remit state sales tax. Unfortunately, legislative efforts at the federal level have gone nowhere. The federal government has been reluctant to interfere with the states on this issue. It remains to be seen in 2017 whether legislation will pass at the federal level, giving states more power to require nonregistered remote sellers to collect and remit sales tax in given states.
Expect more states to enact similar economic nexus standards in 2017. Will an economic nexus case from Alabama or South Dakota make its way to the U.S. Supreme court in 2017, or will the federal government enact legislation to help states bring in more cash?