Wayfair Update: Changing the State and Local Tax Landscapes
The United States Supreme Court decided on June 21, 2018, South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018), wherein a 5-4 decision, the court found in favor of the State of South Dakota by expanding the definition of in-state nexus to include a “virtual presence.” To this end, this landmark decision has created a profound impact on state and local sales tax administration and, in turn, the states’ authority to require sales and use tax registration and collection for out-of-state companies that do not have any physical presence within a specific jurisdiction.
Prior to the decision, the following 11 states had enacted legislation which expanded their respective definitions of nexus: Hawaii, Kentucky, Maine, Massachusetts, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, Tennessee, and Vermont. Apart from Tennessee, which is currently stayed pending litigation, some of these state rules were enforceable upon each State’s enactment – Massachusetts, Ohio, Pennsylvania, and Rhode Island. New York recently issued an administrative pronouncement indicating their rule became enforceable as of June 21, 2018, upon the delivery of the Wayfair decision, while four more states – Hawaii, Maine, Oklahoma, and Vermont – became enforceable on July 1, 2018. Kentucky was originally slated to begin on July 1, 2018; however, it decided to extend enforcement to begin on Oct. 1, 2018.
Since the Supreme Court’s decision, many states, including the District of Columbia, have enacted legislation similar to South Dakota’s rule that requires an out-of-state or remote seller to register and begin collecting sales/use tax if their gross sales in the current or preceding year exceeds $100,000 or the out-of-state or remote seller has 200+ sales transactions delivered into the State during the current or preceding year. There are 45 states and the District of Columbia that impose a state-wide sales/use tax. Of these 46 jurisdictions, 36 states have begun enforcing their rules with California and Texas to begin on April 1, 2019, and Oct. 1, 2019, respectively. There are currently six more states which, have introduced similar legislation – Arizona, Arkansas, Kansas, Missouri, New Mexico, and Virginia. The pending legislation in these states is likely to pass and become enforceable on or by Jan. 1, 2020. Currently, neither Florida nor Idaho have any pending legislation. A listing of all current state thresholds can be found here.
In addition to the new economic nexus thresholds, there are other rules with regards to electronic cookies, election and notice reporting requirements, as well as sales by marketplace facilitators of which out-of-state remote and internet sellers need to be cognizant.
Electronic Cookies (Iowa, Massachusetts, Ohio, and Rhode Island)
Massachusetts established a new bright line sales tax economic nexus standard for internet vendors transacting business in Massachusetts, effective July 1, 2017. In this regard, internet vendors have sales tax nexus in Massachusetts if the vendor has:
- Property interests in and/or the use of in-state software (e.g., "apps") and ancillary data (e.g., "cookies") which are distributed to or stored on the computers or other physical communications devices of a vendor's in-state customers, and may enable the vendor's use of such physical devices;
- For the six-month period, July 1, 2017 to Dec. 31, 2017: If the internet vendor had more than $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions during the period of July 1, 2016 to June 30, 2017;
- For calendar years beginning in 2018 and thereafter: If the internet vendor had more than $500,000 of Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions, during the preceding calendar year.
The validity of the Massachusetts rule is currently being challenged by a Virginia-based online retailer in the Circuit Court for Albemarle County, Virginia on the grounds that the rule violates the Commerce Clause of the United States Constitution and the physical presence “substantial nexus” standard set out by the Supreme Court in Quill Corp. v. North Dakota. (Crutchfield Corp. v. Harding, Va. Cir. Ct., No. CL17001145-00, 10/24/17). In addition to Crutchfield, several other out-of-state remote sellers and online retailers are also challenging the Massachusetts cookies rule.
Moreover, Ohio also passed similar legislation, which has been in effect since Jan. 1, 2018. In Ohio, an out-of-state internet vendor establishes nexus with the State using in-state software and has over $500,000 in gross sales during the current or preceding calendar year through in-state software. Ohio Rev. Code Ann. § 5741.01. At the end of 2017, the American Catalog Mailers Association (“ACMA”) filed a challenge to the rule (American Catalog Mailers Ass’n v. Testa, Franklin Cty., Ohio Ct. Com. Pl., No. 17 CV 11440, 12/29/17); however, in Dec. 2018, ACMA voluntarily withdrew their challenge – for now. The association’s executive director, Hamilton Davidson, said, “The Ohio Department of Taxation has, to date, shown laudable restraint in not seeking to enforce economic or virtual nexus theories against remote sellers before the Ohio legislature has the opportunity to address Ohio’s sales tax requirements in the wake of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.”
In addition, to Massachusetts and Ohio, both Rhode Island and Iowa modified their definitions of sales and seller to include the use of “in-state” software to make sales.
Rhode Island issued a notice on Aug. 4, 2017, which provided details regarding the new laws Gov. Gina Raimondo signed as part of the appropriations bill, H.B. 5175. The legislation not only enacted a nexus threshold like South Dakota’s rule, but it also defined “non-collecting retailers” as a retailer who “use[s] in-state software to make sales at retail of taxable goods/services.” R.I. Code § 44-189.2-2(4)(A); see also, Notice 2017.09, Rhode Island Division of Taxation, Aug. 4, 2017. In Rhode Island, “in-state software” means software used by in-state customers on their computers, smartphones, and other electronic and/or communication devices, including information or software such as cached files, cached software, or ‘cookies,’ or other data tracking tools that are stored on property in [the] state or distributed within [the] state, for the purpose of purchasing tangible personal property, prewritten computer software delivered electronically or by load and leave, and/or taxable services.” R.I. Code § 44-18.2-2(3).
Gov. Kim Reynolds of Iowa signed legislation, effective Jan. 1, 2019, that enacted economic sales thresholds like South Dakota’s rule. In addition, the legislation redefined a retailer to include “retail[ers] who own, license, or use software or data files that are installed or stored on property used in Iowa… [and retailers who] use in-state software to make Iowa sales.” The revised statute goes on to define software or data files as “software that is affirmatively downloaded by a user… downloaded as a result of the use of a website, preloaded software, and cookies.” Iowa Code § 423.14A.3.c. (1). “In-state software” means computer software installed or stored on property located in Iowa or that is distributed within Iowa for facilitating a sale by the retailer. Iowa Code § 432.14A.3.c.(2).
“Election” and “Notice Reporting” StatesPrior to the Wayfair holding released in June 2018, there were at least 11 states which had election or notice reporting requirements, meaning that if an out-of-state remote or internet seller with gross sales exceeding a certain dollar threshold in the current or prior year, they had to either provide notice to their customers (typically on the face of the invoice) that use tax may be due, provide annual summary to each customer(s) with same language and then provide annual information to the Department of Revenues or voluntarily register and start collecting tax. Since the Wayfair holding, Connecticut, Georgia and Iowa have enacted legislation which, allows the out-of-state remote or internet seller to either elect whether they will provide notice to their customers and states regarding their sales, or in the alternative, elect to register and begin collecting and remitting the sales/use tax due. It is crucial to emphasize that failure to comply with the election and/or notice and reporting requirements could result in additional fees and penalties due to each state.
In addition to states enacting legislation to address remote and internet sellers, states are also introducing and enacting legislation which concerns sales by marketplace facilitators – i.e., Amazon, Etsy, etc.
If an online marketplace operates its business in a state and provides e-commerce infrastructure as well as customer service, payment processing services and marketing, the marketplace facilitator is required to register, collect and remit tax on behalf of the third-party sellers. In addition, the third- party sellers may be required to report their marketplace sales in their gross sales but deduct them as marketplace sales. Many states began developing rules and policies and/or enacted legislation simultaneously upon their development of the various Wayfair nexus thresholds.
States which currently require marketplace facilitators to register and collect, remit sales, and use tax include:
1. Alabama – Jan. 1, 2019
2. Connecticut – Dec. 1, 2018
3. Iowa – Jan. 1, 2019
4. Massachusetts – Sept. 22, 2017
5. Minnesota – Oct. 1, 2018
6. New Jersey – Nov. 1, 2018
7. Oklahoma – July 1, 2018
8. Pennsylvania – April 1, 2018
9. South Dakota – March 1, 2019
10. Washington – Oct. 1, 2018
11. Wyoming – July 1, 2019
In addition, states which have introduced Marketplace Facilitator legislation include:
- Arizona – Sept. 20, 2016 (See, TPR-16-3, Arizona Transaction Privilege Tax Ruling, AZ DOR 9/20/2016; H.B. 2702 introduced on 2/13/2019)
- California – Legislation introduced Dec. 14, 2018 and amended on Feb. 14, 2019 (Assembly Bill No. 147)
- District of Columbia – April 1, 2019 (enforcement depends on approval of the Mayor)
- Georgia – Legislation introduced on Feb. 12, 2019 (House Bill 276)
- Hawaii – Legislation introduced on Jan. 18, 2019 (H.B. 113 and S.B. 396)
- Indiana – Legislation introduced on Jan. 14, 2019 (2019 IN H 1352)
- Kansas – Legislation introduced on Feb. 14, 2018 (H.B. 2352)
- Maryland – Legislation introduced on Feb. 14, 2019 (2019 MD H 1301)
- Missouri – Legislation introduced on Feb. 12, 2019 (2019 MO H 908)
- Nebraska – Legislation introduced on Jan. 15, 2019 (2019 NE L 291)
- North Dakota – Legislation introduced on Jan. 21, 2019 (2019 ND S 2338)
- Rhode Island – Legislation introduced on Feb. 7, 2019 (2019 RI S 251)
- South Carolina – Legislation pre-filed on Dec. 12, 2012; introduced on Jan. 8, 2019; amended Jan. 29, 2019 (2019 SC S 214)
- Utah – Legislation introduced on Feb. 13, 2019 (2019 UT S 168)
- Vermont – Legislation introduced on Jan. 29, 2019 (2019 H. 117)
- Virginia – Legislation introduced on Jan. 18, 2019 (2018 VA H 2801)
- West Virginia – Legislation introduced on Feb. 1, 2019 (2019 WV H 2813)
Over the next few months, we will continue to see a stream of additional guidance from the states as to how they expect the Wayfair decision to be applied within their respective jurisdictions. The information contained herein is meant to assist businesses as they review their current state requirements, and move to make the necessary changes to become compliant. While this process may appear to be straightforward in some states, we are finding that others may require further clarification.
Subject matter expertise
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
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