New Jersey Enacts Sales Tax Reforms – Taxing Remote Sellers and Marketplace Facilitators
On October 5, 2018, New Jersey’s Governor Murphy signed critically important sales-tax legislation significantly expanding the list of taxpayers that are now required to collect and remit New Jersey sales tax. Under the new law (A-4496), New Jersey has joined the rapidly-growing number of states enacting “economic nexus rules” following the wake of this summer’s landmark U.S. Supreme Court ruling in the case of South Dakota v. Wayfair. Provided certain minimum connections exist, in addition to requiring that “remote sellers” collect and remit New Jersey sales tax, the new law also expands New Jersey’s sales tax nexus rules by imposing collection and remittance obligations on “marketplace facilitators.”
On June 21, 2018, the U.S. Supreme Court issued perhaps the most significant state and local tax case in a generation. In Wayfair, the Court overturned decades of precedent, reversed its prior decision in Quill Corp. v. North Dakota, and abandoned its longstanding bright-line physical-presence requirement for the imposition of tax collection responsibilities on out-of-state retailers. Based on the Courts holding in Wayfair, a mere “economic” presence within a state, as opposed to a “physical” presence, is sufficient to justify taxation, provided certain minimum connections exist in the state seeking to impose the tax collection requirement.
The New Jersey statute tracks the South Dakota statute that was upheld by the Supreme Court in Wayfair. Now, under New Jersey’s law, a remote seller, i.e., one lacking in-state physical presence, is now required to register, collect, and remit New Jersey sales tax if (a) the remote seller’s gross revenue from delivery of tangible personal property, specified digital products, or services, in New Jersey during the current or prior calendar year, exceeds $100,000; or (b) the remote seller sold tangible personal property, specified digital products, or services for delivery into New Jersey in 200 or more separate transactions during the current or prior calendar year.
Supporters of the new state law argued that expanding the sales tax nexus rule to include out-of-state retailers, (who had historically escaped taxation under the old rules) will level the playing field between in-state retailers (who were historically the only retailers required to collect tax). The new law expanding the collection and reporting obligation takes effect on November 1, 2018, and will be applied prospectively only.
In addition to taxing remote sellers under the new law, New Jersey also joins the growing movement to impose sales tax collection obligations upon online “marketplace facilitators.” Generally,” marketplace facilitators” are businesses that create a marketplace within which buyers and sellers transact business, but who may not be the party making the retail sale, such as Amazon, eBay, or Etsy. However, if the facilitated sale is subject to sales tax, the logical question arises as to 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? Various states grappling with the issue have chosen different answers, but increasingly states have begun to impose tax collection obligations directly upon the marketplace facilitator. For its part, New Jersey chose to impose the tax collection responsibilities on marketplace facilitators for the sales they facilitate.
However, while this new law takes effect on November 1, 2018, to ensure accurate and timely collection of taxes, the New Jersey Division of Taxation has the discretion to suspend these requirements for a period not to exceed 180 days.
Sales tax nexus rules are changing in many states, but New Jersey is not unique in its approach. Of note, the new law applies to more than just traditional online retailers, because it also imposes sales tax collection obligations on taxpayers who are not making the actual retail sale. Therefore, taxpayers conducting business in New Jersey, or with New Jersey customers, now need to analyze the specific impact of the New Jersey provisions and properly adjust their business processes.
Businesses – meaning retailers and marketplace facilitators – interacting with New Jersey customers should immediately undertake an inventory of the products and services being sold into New Jersey to determine whether they need to register, collect and remit New Jersey sales tax. Furthermore, now may be a good time to consider a “voluntary disclosure,” to resolve any current noncompliance before tax audit activity increases –and not only for New Jersey taxes, but also any other state that has enacted rules like New Jersey.
Lastly, keep in mind that sales taxes are “trust-fund taxes” and often carry personal liability for key owners, operators, and managers. As such, businesses and their advisors need to be fully in compliance with sales tax collection and reporting law because the stakes for non-compliance have never been greater.
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