10 Questions: Economic Nexus and the impact on marketplace collection
In June of 2018, the United States Supreme Court issued the landmark Wayfair decision which will forever impact sales across state borders. Fast forward fourteen months, and over 20 states are now also opting to impose sales tax collection obligations on online “marketplace facilitators.” However, if the facilitated sale is subject to sales tax, which party should be required to collect tax from the buyer? The online remote seller utilizing a facilitator’s marketplace, or the marketplace facilitator itself?Below are a few of the questions asked by attendees of the webinar, with answers provided by our CohnReznick subject matter experts: Tony Buffkin, Director and Henrietta Fuchs, Partner.
Q. Can you define digital goods?A. Generally speaking, digital goods mean goods that are delivered and transferred in digital form. Common examples of digital goods include e-books, downloaded music, streaming media, photos, magazines, etc. Each state has its own definition, but New Jersey is part of the Streamlined Sales Tax and they define “specified digital product” as “an electronically transferred digital audiovisual work, digital audio work, or digital book; provided, however, that a digital code which provides a purchaser with a right to obtain the product shall be treated in the same manner as a specified digital product.” New Jersey. Rev. Stat. Section 54:32B-2(zz). Furthermore, you would need to look at each state’s imposition to determine if digital products are subject to tax.
Q. We provide fulfillment services in addition to making direct internet sales into all U.S. states. Our fulfillment sales are tax-exempt due to the fact they are resales. However, do these fulfillment sales, though not going directly to the buyer (rather to the customer) count toward the thresholds in the buyer’s sales?A. Based on your question, it appears your company is drop-shipping products to the buyer’s customer. If that’s the case, there are two transactions occurring here. The first transaction involves the sale from the marketplace seller (the buyer, in your example) to its customer. The second transaction involves a sale from your company to the marketplace seller, which your company is shipping to the marketplace seller’s customer. Generally, the sale between your company and the marketplace seller (the buyer) is treated as an exempt sale for resale; however, states vary on the requirements to document the exempt sale for resale. Typically, the sale from the marketplace seller to its customer will be a taxable transaction unless its customer is exempt. The sales that are fulfilled (drop-shipped) by your company would generally be included in calculating the nexus threshold for the buyer since they are generally taxable. Your company may be determined to be a marketplace facilitator in several states, depending upon a given state’s definition. Many states include such activities as fulfillment services in their definition, even if your company is not receiving funds from the marketplace seller’s sale to its customer.
Q. Most of our wholesale sales are for orders taken over the phone or via email from other states. Are we affected by this? Our website sales are very low.A. From the question, it sounds like you are making the sales yourself, not through a marketplace facilitator. Nevertheless, in a post-South Dakota v. Wayfair environment, you will nevertheless need to pay close attention to the various state Wayfair economic nexus rules. Even though you are a wholesaler, some states count wholesale sales, not just taxable retail sales, toward the economic nexus thresholds. Accordingly, if you have economic nexus in a given state based upon your sales volume, you may still have a filing obligation or might still need to register in order to issue or accept exemption certificates. Each state has authority to write these rules as they see fit, so a state-by-state analysis is probably needed.
Q. Can you also address implications to software companies? Including Software as a Service, electronic download, and physical download?A. Many states subject Software as a Service (SaaS) to sales/use tax and most states tax the sales of prewritten software. Therefore, companies that sell software remotely or provide SaaS should be aware of the Wayfair economic nexus rules. Specifically, the company should track where its customers are using the software or services; if the company meets the economic threshold in the customer’s state; and if the sale of software or SaaS is taxable in the customer’s state. In addition, many states’ economic threshold is based on gross – not taxable – sales. Therefore the company may have a sales/use tax filing responsibility, but no tax due if the sales of software and SaaS are nontaxable.
Q. My company sells primarily to the defense market, so we used to follow the traditional nexus definition. Do we now have to follow the economic nexus rules, and the resulting sales thresholds, when determining what states we need to register in, and collect sales tax in?A. You do need to be aware of the differing standards in each state to determine whether you have an obligation to register, collect tax, and file returns. For example, some states only include taxable sales of tangible personal property and/or taxable services in calculating the threshold, while others base the calculation on total gross receipts, which would include exempt sales of tangible personal property and services. That is the case whether you are selling directly to the federal government or to a contractor.
Q. Can you speak about Kansas? I am told that nexus occurs after one sale or $1. Plus they have address-based sales tax rates. One can't even use ZIP codes. And these rates can theoretically change town by town with very little notice. How does a small company do this? I can't use my shopping cart software. Supposed to start October 1.A. Kansas presents a unique scenario with respect to its implementation of the Wayfair economic nexus rules. Kansas attempted to pass its own Wayfair legislation, but for political reasons that legislation was vetoed by the governor. In the absence of legislation, the Kansas Department of Revenue issued guidance (Notice 19-04), which administratively imposed economic nexus without any safe harbor (i.e., no dollar or transaction thresholds). Whether economic nexus without a safe harbor to protect small sellers would, in fact, be constitutional under the Commerce Clause, the Due Process Clause, and the Wayfair decision was an open question that was causing some concern among taxpayers and advisors. However, on Sept. 30 (a day before the rules were to go into effect), the Kansas attorney general issued an opinion (No. 2019-8) stating, in summary, that the revenue department’s administrative rule exceeded the authority granted by the legislature and was inconsistent with the Wayfair decision. So, for now, it seems taxpayers may have been saved. Taxpayers should continue to monitor Kansas for additional guidance.
Q. One situation may be that one sells to a reseller in another state. In the past, if that reseller was in my state, I had to make sure I have a resale tax certificate on file. Do I now have to collect resale tax certificates from all my resellers in all the states?A. This is a good question. Prior to the Wayfair decision, wholesalers only needed to collect resale certificates for where they made deliveries to and had physical presence (nexus). Post-Wayfair, more likely than not, the wholesaler increased their nexus footprint due to exceeding the economic nexus thresholds. So, yes, it is a good practice to collect and update (if applicable) exemption certificates for states that you ship to and have nexus (physical presence and/or economic presence).
Q. Do you have a chart or matrix of all 50 states and the District of Columbia showing the requirements for registration and collection/remit/file in each?A. CohnReznick’s State and Local Tax practice continually monitors the states for changes in the economic nexus standards. Learn the current requirements in each state here.
Q. If a manufacturer is doing drop-shipping/fulfillment for a large retailer, is that positioning considered a marketplace facilitator? They are getting paid directly from the retailer and not at the point of sale.A. This is a good question. Drop-shipper situations can present tricky compliance issues. In a typical drop-ship scenario, a seller sells an item to a consumer, but buys the item from a third party, asking that third party to ship the item directly to the consumer. There are three parties and two distinct transactions, which can cause a host of issues, among others, related to issuing and accepting resale certificates. Without knowing more about your specific facts, a typical drop-ship probably does not implicate marketplace facilitator rules. Nevertheless, in a post-Wayfair environment, more and more companies may need to register in more and more states due to economic nexus, which just might, actually, alleviate some of the traditional issues pertaining to resale certificates presented by drop-ship fact patterns. Regardless, though, it would be important to review your specific facts to better understand whether the marketplace facilitator rules might have an impact.
Q. We are a 501(c)(6) professional membership organization located in New York who has membership revenue and offers online continuing education courses. Should we be collecting sales tax on those sales?A. This is a great question, because it touches upon a lot of different areas. First, you are located in New York, but do you have members or sales in other states? Under Wayfair’s economic nexus rules, understanding how and where you operate is the first step. Second, you’ll want to know whether your status as a 501(c)(6) organization confers tax-exempt status or not, which can differ state by state. Third, you have two lines of revenue, membership revenue as well as fees from online education courses. You’ll want to understand whether New York, and any other state where you have nexus, imposes sales tax on each activity. To answer this, you’ll want to understand what a member receives in exchange for his/her membership fee. The taxability determination may vary state by state. Similarly, you’ll want to know whether each state where you have nexus taxes online education courses. The answer to that can vary as well.
Tony Buffkin, Director, State and Local Tax Services
Henrietta Fuchs, Partner, Manufacturing & Distribution Industry Practice Co-Leader
Subject matter expertise
Director, State & Local Tax
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On-Demand Webinar: Economic Nexus and the Impact on Marketplace Collection for Sales Tax
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.