As state and local tax authorities continue to pursue lost sales tax revenue from out-of-state business e-commerce, a new enforcement approach has emerged. Referred to as “reporting laws,” these statutes require out-of-state sellers with no sales tax nexus in a given state to comply with some type of reporting or notification requirement when making remote sales. These new laws attempt to impose a new compliance requirement on out-of-state sellers for sales and use tax reporting purposes, thereby compelling taxpayers with no physical connection to a given state to provide sales and use tax related information to taxing authorities.
E-Commerce and State Sales Tax Nexus
State authorities’ frustration with lost sales tax revenue related to the growth in e-commerce stems from the U.S. Supreme Court’s decision in Quill Corp v. North Dakota, 504 U.S. 298, which held that states can only require taxpayers with a physical presence in a given state to collect sales tax. As e-commerce has continued to expand and erode states’ sales tax bases, state legislatures have looked for ways to halt the decline in revenue without exceeding the physical standard requirement held in Quill. The reporting laws that states are increasingly turning to provide a work-around for purposes of the physical presence standard set in Quill in that these laws do not require remote sellers without physical presence in a state to actually collect and remit tax, but rather only require some type of compliance reporting.
State Specific Reporting Laws
States that have recently enacted sales tax reporting laws include Colorado, Kentucky, Louisiana, Oklahoma, South Carolina, South Dakota, and Vermont. Each of these states’ laws has its own nuances and requirements, further complicating out-of-state taxpayers’ efforts to understand compliance responsibilities. These reporting laws typically have two components: (1) remote sellers must file an annual report with the Department of Revenue and (2) sellers must provide notification to in-state buyers of use tax responsibilities.
Colorado was the first jurisdiction to enact these types of sales tax reporting requirements. After the passage of Colo. Rev. Stat. Section 39-21-112.3.5 in 2010, a taxpayer sought a permanent injunction in Federal District Court, arguing that the statute violated the Commerce Clause. However, the U.S. Court of Appeals for the 10th Circuit upheld Colorado’s law on February 22, 2016, with the U.S. Supreme Court declining to review the Appeals Court decision (Direct Mktg. Ass’n v. Brohl, 2016 BL 411370, U.S., No. 16-267, petition for certiorari denied Dec. 12, 2016).
Colorado’s law may now have opened “Pandora’s box” with regard to this issue. Other states, including Alabama, Kansas, Nebraska, and Utah, have plans to introduce similar laws. As states continue to pursue lost sales tax dollars, reporting laws may appear with increasing frequency. It is unclear what tools are at states’ disposal that would compel taxpayers to comply with sales tax reporting laws. But many practitioners have noted that the burden of reporting laws may incentivize more taxpayers simply to start collecting sales tax in jurisdictions where they have no physical presence. The incentive for remote sellers to collect sales tax may prove a powerful tool for states in recapturing lost sales tax revenue related to the growth in e-commerce. As such, taxpayers should anticipate an expansion in these types of sales and use tax reporting laws.
However, it should be noted that Colorado’s current law may undergo substantive revision via Colorado Senate bill SB 17-238. Current law requires retailers that do not collect Colorado sales tax to provide notification to all Colorado purchasers showing certain information. The notification must be sent separately to all Colorado purchasers by first-class mail. SB 17-238 specifies that the notification must instead be sent to the email address used to complete the purchase and not be included with any other emails to the purchaser regarding the purchase. SB 17-238 also repeals the notification requirement that the retailer that does not collect Colorado sales tax must send to the Department of Revenue for each Colorado purchaser that specifies the total amount paid for Colorado purchases.
Taxpayers can no longer rely on a lack of physical presence in determining state sales tax reporting obligations. In navigating multi-state sales tax compliance, taxpayers will need to be cognizant of myriad new reporting laws. As such, taxpayers selling in more than one tax jurisdiction, regardless of physical presence, should consult with a tax advisor to assist in monitoring any potential new compliance requirements.
We will continue to monitor state sales tax reporting activity and will keep you apprised of changes. Please contact your FGMK tax professional to discuss the implications of new sales tax reporting requirements or any other sales tax matters that may impact your business.
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