Five months ago, the Supreme Court decision in South Dakota v. Wayfair, Inc. opened the floodgates of state sales and use tax collection upon remote (out-of-state) sellers. Since that time, economic nexus laws have gone into effect in 24 states. As of December 1, 2018, that number will increase to 26 states when Colorado and Connecticut begin enforcement of their economic nexus rules.
Economic nexus laws require remote sellers to collect and remit sales or use tax on their sales into a state where the business does not maintain a physical presence but does exceed specified revenue or transaction thresholds. While most of the states which have enacted economic nexus rules have done so by expressly following the blueprint of the South Dakota law validated by the Supreme Court, it is important to note there are several states that have put their own unique spin on economic nexus including very different threshold variations.
Connecticut Economic Nexus
On June 6, 2018, the State of Connecticut passed SB 417 which imposes a collection and remittance responsibility on remote sellers with Connecticut sales of at least $250,000 over 200 or more transactions. Connecticut has a single, semi-independent local jurisdiction, higher thresholds than the South Dakota Law at issue in the Wayfair case, and a straightforward sales and use tax regime.
Connecticut serves as an example of a fairly simple state that is not a streamlined sales tax state implementing economic nexus within the spirit of the Supreme Court Decision in South Dakota v. Wayfair, Inc. Although the state has an approaching effective date, Connecticut has yet to publish any further guidance regarding payment and reporting requirements for remote sellers likely indicating that the state intends for remote sellers to pay and file taxes in the same manner as other out-of-state vendors with physical nexus. This approach is much more direct and easier to understand for taxpayers than the approach that states like Colorado have taken that require robust guidance from the state.
Colorado Economic Nexus
Unlike Connecticut, little is simple when it comes to sales and use tax in Colorado. On September 11, 2018, the Colorado Department of Revenue adopted emergency regulations requiring out-of-state retailers doing business in Colorado that have substantial nexus with the state to collect Colorado sales tax beginning December 1, 2018.
In line with South Dakota and many other states with economic nexus rules, Colorado considers out-of-state retailers to have a substantial nexus with Colorado for sales tax purposes when the retailer’s gross revenue from the sale of tangible personal property or services delivered into Colorado exceeds one hundred thousand dollars or the retailer sold tangible personal property or services for delivery into Colorado in two hundred or more separate transactions. These temporary emergency regulations will proceed through the rulemaking process until they are made permanent by the Colorado Department of Revenue sometime in 2019.
Colorado is a “Home Rule” state for the purposes of sales and use taxes. In other words, many of the cities in Colorado are free to enact and administer their tax laws separate and apart from the state. Due to this legal “quirk” of Colorado tax law administration, the state has chosen to only apply the nexus requirements in the emergency regulations to the state and state-administered localities. It is important to note Colorado is expressly requiring that remote sellers collect sales tax (as opposed to use tax) as well as sales tax in any state-administered jurisdiction.
This new requirement will compel certain sellers to register to collect tax in Colorado for the first time. If your business meets either of the above thresholds, and is not currently registered to collect Colorado tax, Colorado advises that you do so by November 30, 2018 so that you can begin collecting tax by December 1 (unless your business chooses to accept the states grace period). When you register and select locations in which you will be collecting tax, you should include any non-physical location in which you will be making sales. While Colorado suggests not “selecting all,” they do recognize that companies that sell into multiple locations (even those that sell into 100+ locations) should indeed select those locations. They also specifically note that additional locations can be readily added in the future as needed and that zero returns are not required for non-physical locations if no sales are made to those places for a given reporting period.
Colorado Issues Grace Period for Out-of-State Retailers
The Colorado Department of Revenue recently updated their guidance for out-of-state retailers indicating that the Department of Revenue is offering a grace period through March 31, 2019, to comply with the new destination sourcing rules. The updated guidance indicates that out-of-state retailers will be automatically granted a waiver from compliance with the destination-sourcing changes. Retailers that do not collect sales tax during the grace period must still comply with Colorado’s reporting statute (C.R.S. § 39-21-112(3.5)) which requires non-collecting retailers to provide certain notices to Colorado purchasers as well as the Department of Revenue. The Department has indicated that the reporting requirements for retailers that do not collect tax during the grace period will be strictly enforced.
The state of Colorado provides helpful information for in-state retailers here.
Economic Nexus Impact on Colorado In-state Sellers
Unlike many other states, the changes brought about by Colorado’s new economic nexus requirements (although not expressly) also seem to impact in-state sellers. Effective December 1, 2018 (unless your business chooses to accept the states grace period), the state of Colorado will require in-state sellers to collect and remit state sales tax and any applicable state-administered local taxes based on the jurisdiction’s tax rate at the point of delivery. This rule is a significant departure from the rule currently in effect which applies tax at the point of delivery but specifies that sellers are only required to collect local tax for those state-administered locations where they have a physical presence. This change is logically connected to the economic nexus changes as the rule works together with economic nexus in a way that creates identical collection responsibilities for remote and in-state sellers – at least as they relate to state-administered jurisdictions.
For example, a seller delivering an item from their location in City A to the customers’ location in City B, may not be required to collect tax for City B unless they are physically present there. Under the rule effective December 1, 2018 (unless your business chooses to accept the states grace period), sellers will be required to collect City B tax assuming City B is a state-administered locality. This rule change does not impact a seller’s tax collection responsibilities in locally-administered jurisdictions.
Like the economic nexus rule, the destination sourcing rule for in-state sellers offers a grace period through March 31, 2019, to comply with these changes to ensure retailers have sufficient time to make the required systems changes. Unlike the out-of-state sellers, there is no additional reporting requirement. Businesses will be granted a waiver from compliance with the destination-sourcing changes automatically until then.
The State of Colorado provides helpful information for in-state retailers here.
Economic Nexus Changes in 2019
The new year will bring remote sales in an additional 6 states under the impositions of taxing authorities as Georgia, Iowa, Louisiana, Nebraska, Utah and West Virginia all join the growing majority of states cashing in on the economic nexus gold rush. With Tennessee and Wyoming nexus laws pending decisions by the courts, only 11 states (not including Alaska which only has local sales tax) remain to enact economic nexus rules. Four of those 11 states are the major economic powerhouses of California, Florida, Texas and New York (CA & TX already have draft versions of economic nexus rules). As you can tell, the reality of economic nexus can be fairly simple or very complex. Having a comprehensive cloud-based tax solution with rooftop address accuracy could drastically reduce the burden and risk for a business.