Several States Move to Tax Remote Commerce – What Businesses Need to Know

Erik Wallin
July 9, 2018

In the wake of the Supreme Court decision in South Dakota v. Wayfair, Inc., which has effectively killed the physical presence rule established by the Quill decision, states have been empowered to collect sales and use tax from remote sellers within the somewhat muddier standard that is “Substantial Nexus.” And to no one’s surprise, several have done just that.

With the ink just barely dry on the Wayfair ruling, Alabama, Hawaii and Wisconsin have each provided guidance on how they plan to apply tax to remote commerce.  Additionally, New Jersey has moved to enact economic nexus legislation in the wake of Wayfair. Some of these rules are immediately effective while others will be effective as soon as October 1. The following is a brief summary of what you need to know to maintain compliance in these states.

Alabama Issues Guidance for Remote Sellers

Alabama, like South Dakota, enacted a Regulation (Rule 810-6-2-.90.03) that was intended to present an outright challenge to Quill. Under this Rule, sellers that make over $250,000 in sales to Alabama customers are subject to collect and remit tax under the Simplified Sellers Use Tax Program which applies a higher state-level rate but eliminates the need to separately collect and remit local tax.

While this Simplified Sellers Use system is being used by some sellers on a voluntary basis, the mandatory component of the Rule was challenged in court. However, the South Dakota case moved far faster, with the Wayfair decision effectively ending the Alabama litigation as well.

On July 3, 2018, the Alabama Department of Revenue issued guidance indicating that Rule 810-6-2-.90.03 is effectively no longer subject to legal challenge as “Wayfair removed the constitutional impediments to the rule, it will be enforced going forward.” The guidance makes clear that the rule will be applied prospectively for sales made on or after October 1, 2018 (rather retroactively to the Rules effective date of January 1, 2016).  Remote sellers meeting the $250,000 threshold are directed to the following website to begin the registration process:  https://revenue.alabama.gov/wp-content/uploads/2017/07/SSUT-Application.pdf

Alabama has also recently enacted a law (Act 2018-539) that requires marketplace facilitators to either register to collect for their marketplace clients or to comply with notice and reporting requirements. In its guidance, Alabama clarifies that marketplaces are free to register under the Simplified Sellers Use program on or before October 1 and that any remote seller who can demonstrate that marketplaces are collecting on their behalf on all Alabama sales, is relieved of the liability to collect and remit themselves.

Alabama also promises to continue studying the changes to the tax landscape and issue additional guidance over the next several months and into 2019.

Hawaii Passes Economic Nexus Legislation

Hawaii very recently passed economic nexus legislation (Act 41) that was ready to go the minute Wayfair was decided, and on June 27, 2018, the Hawaii Department of Taxation released Announcement No. 2018-10 explaining how their General Excise Tax (GET) would apply on remote commerce.

Pursuant to Act 41, remote sellers with gross income of $100,000 or more from sales in the state or those that have engaged in 200 or more separate transactions in the state are required to remit GET.

For a variety of reasons, Hawaii has always considered their general excise tax to be sufficiently different from sales tax and they have taken the position that physical presence was not necessarily required. Through that lens, they view the Wayfair decision as clarifying the legality of an economic nexus standard, and despite the fact that Justice Kennedy attached significant importance to the non-retroactive nature of the South Dakota law, Hawaii is requiring sellers to remit tax on historical transactions back through January 1, 2018 if they met the required thresholds in the calendar year 2017 or calendar year 2018. Remote sellers who have not yet registered will be allowed to remit on a “catch-up” basis without penalty or interest by paying in full on their next return or spreading the liability over the remaining periods in the current tax year.

UPDATE: July 16: Hawaii Backtracks on Retroactive Collection for Remote Sellers [subscribe to our regulatory feed for timely updates]

New Jersey Economic Nexus Legislation

Within two days of the Wayfair decision, the New Jersey Legislature introduced Assembly Bill 4261, an economic nexus bill which requires remote sellers with over $100,000 in sales or 200 or more separate transactions in the current or prior calendar year to collect and remit sales tax. A short ten days later, on July 1, 2018, the New Jersey Legislature (both houses) passed the bill, which now only requires the governor’s signature to become law. If passed, which seems very likely, the law would take effect on October 1, 2018. Note that in addition to economic nexus, Bill 4261 contains provisions requiring marketplace facilitators to collect and remit sales tax for non-registered marketplace sellers.

Whether other states can move to enact legislation as quickly as New Jersey remains to be seen, with summer legislative recesses already in effect or in the immediate offing.

Wisconsin Remote Commerce Rules

Prior to the Wayfair decision, Wisconsin had no legislative or rulemaking activity of any kind regarding economic nexus. Nonetheless, on July 5, 2018, the Wisconsin Department of Revenue announced that they will require out-of-state sellers with no physical presence in Wisconsin to collect and remit Wisconsin sales or use tax on sales of taxable products and services into the state beginning October 1, 2018. This announcement published on the Department of Revenue website describes their plan to develop rules consistent with the U.S. Supreme Court’s recent decision in Wayfair in short order.

Wisconsin is obviously moving quickly to react and capitalize on the Wayfair decision and believes they can impose tax on remote commerce without passing a law and without yet having a final regulation in place. One might expect (although nothing is certain) that Wisconsin will be predisposed to using the $100,000 or 200 or more transactions threshold adopted by South Dakota.

Final Thoughts

States are moving at breakneck speed to adapt to the new era in sales tax and collect tax on remote commerce. While some states such as Hawaii and Alabama had their laws essentially “ready to go” for this day, others such as New Jersey and Wisconsin are taking extraordinary steps to catch up. While a handful of states have placed themselves in a position to collect tax as soon as July 1, others are looking to October 1 as the day when these new requirements go into effect. With the Wayfair decision only 3 weeks, old, this is clearly just the tip of the iceberg. Businesses must be ready to adapt or they will quickly find themselves well behind the compliance curve.

Take Action

View the onDemand webinar, South Dakota vs. Wayfair Supreme Court Decision – Live Q&A with Regulatory Experts to learn how the Supreme Court’s ruling will affect your eCommerce sales tax compliance process, best practices to ensure compliance in states where you have nexus, how this decision could trigger similar legislation in other states, and what you need to worry about now. Looking for tools? Start here to automate and optimize vendor invoice sales AND use tax accuracy on purchases or improve exemption certificate management capture, validation and retrieval.

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Author

Erik Wallin

Erik Wallin is a Senior Tax Counsel on the Tax Research Team at Sovos Compliance. Erik has been with Sovos Compliance since 2011, and his main areas of focus are on U.S. Transaction Tax Law which includes special expertise in the taxation of technology and the taxation mechanisms that apply throughout the Colorado home rule jurisdictions. Erik is a member of the Massachusetts Bar, has a B.A. from York College of Pennsylvania, a J.D. from New England School of Law, and an LL.M. in Taxation from Boston University.
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