Thank you all who joined our webinar on June 27, “South Dakota v. Wayfair One Year Later – Sales Tax Retrospective and Look Ahead,” and submitted the following questions during the Q&A portion. They really put our regulatory analysis team to the test, and we hope you find the responses valuable as you prepare for further sales tax economic nexus and marketplace changes.
Questions ranged from your more basic economic nexus “and/or,” rule clarification to Colorado home rule cities, resale certificates, wholesaler concerns, simplified local tax options, marketplace rules and limiting transactions to “retail sales,” retroactivity, and more.
Our agenda consisted of:
- What’s happened since last June 21?
- What is happening right now?
- What “gotchas”/traps are out there?
- What have been some repercussions of Wayfair?
If you were unable to join us, Sovos is holding an updated version of this South Dakota v. Wayfair One Year Later webinar on July 25.
For those who asked a question during the live event, search through the questions below for answers to your specific area of concern.
South Dakota v. Wayfair economic nexus Q&A
Q: Can you talk about Colorado home ruled cities in respect to economic nexus?
A: Hope you enjoyed the webinar. From what we understand (and we try to keep in close contact with Colorado home rule jurisdictions), no home rule city has yet to officially announce their own local economic nexus requirement.. It’s certainly possible that a locality could attempt to, on their own, enact such a standard, but whether it would pass legal muster is far from certain. What is clear is that the Colorado state requirement only extends to state-administered cities and districts.
Q: Is there any indication that Congress may act in regard to enforcing the undue burden portion of this ruling?
A: While there are a couple of bills out there that, if passed by Congress and signed by the President, would change the remote collection landscape, our understanding is that right now none of these bills have any serious momentum. It’s also possible that there could be state litigation that tests out what the outer limit of an “undue burden” might be. In fact, if I had to guess, I would guess that we would see state litigation before we would see federal legislation.
Q: Can you supply a list of states’ thresholds and dates when the nexus was triggered?
A: Yes: Such a state sales tax economic nexus threshold list is posted to the Sovos website.
Q: Can we accept a resale certificate from a current customer taxable in one state for a new state where they didn’t have nexus before?
A: States have varying rules as to what documentation is sufficient to properly identify a non-taxable sale for resale. For example, some states will take the SST Simplified Exemption Certificate, and some states will take the Multijurisdiction Uniform Sales and Use Tax Exemption Certificate. However, outside of the drop shipment context, I would suspect that most states would require that the certificate show a valid in-state ID for your customer.
Q: I am a large Amazon FBA (only) seller. Can you tell me in which cities in Colorado am I required to register for a tax certificate and file tax returns? I am an out of state seller.
A: Based on the Colorado economic nexus standard, if your company exceeds the $100,000 threshold, your obligation is to collect state sales tax, county sales tax and city/district sales tax in any state-administered city or district. The Colorado DOR has tons of resources available online (including on-demand webinars) about how to register and collect the required local tax. However, the definitive list of state-administered localities are listed in DR 1002. Now, the CO state rule does not require local registration and local filing in any self-administered city or district and to our knowledge, no self-administered city has enacted an economic nexus standard.
Q: Are there any updates on Home Rule cities in Colorado switching to letting the state collect?
A: Yes, this is indeed a very likely outcome. For example, the city of Alamosa became a state-administered locality effective July 1, 2019. But, some Colorado localities are very devoted to local administration and don’t yet understand the money they are leaving on the table by continuing to hold on to local administration.
Q: How do these thresholds affect a company that is primarily a wholesaler and has less than $500k of taxable replacement part sales?
A: The rules vary by state; however, quite a number of states count their thresholds based on gross sales, meaning it does not technically matter that they might be exempt sales. So, for an organization such as yours, it’s important to understand how each state counts transactions for their threshold because if you make both taxable and resale sales in a given state you should register, collect, and remit. Now, if you make only exempt sales in a given state and you cross the threshold, you may technically have a registration requirement but might make a rational business decision as to whether you should register simply to file zero returns.
Q: Will the threshold in Arizona change again in October 2020 and 2021 or January?
A: Arizona HB 2757, which enacted Arizona’s economic nexus thresholds, states that remote sellers are subject to transaction privilege tax if their gross proceeds from sales into Arizona exceed:
- For Calendar Year 2019 – $200,000
- For Calendar Year 2020 – $150,000
- For Calendar Year 2021 and for each Calendar Year thereafter, $100,000
While Arizona has not published specific guidance on these thresholds, the use of the term “calendar year” implies that the thresholds for 2020 and 2021 will go into effect on January 1 of those years. However, this interpretation may change as more information becomes available from Arizona.
Q: Do the Louisiana “local” taxes include the parishes?
A: Yes, for purposes of the remote seller tax simplification currently in place in Louisiana, the combined rate is inclusive of both parish and city taxes. This means that qualifying remote sellers would collect the special combined rate in lieu of standard Parish or city taxes. Be sure to subscribe to our regulatory feed for weekly updates. https://sovos.com/regulatory-analysis/
Q: Will ShipCompliant help fill out forms with the appropriate district taxes? Meaning will ShipCompliant generate forms with the right taxes?
A: ShipCompliant does provide returns with all appropriate sales tax populated, which will include district taxes. However, you will need to ensure you are signed up for the proper frequency of the tax return. Some users are able to report only state-administered taxes in a state, while others will need district taxes, and so we make them both available to subscribe to. If you need to report district taxes then, make sure you are signed up for the frequency that provides the most detail. How that report is designated can vary among states, with it being an “economic nexus” frequency in some states (like Colorado) or a “with district taxes” frequency in others (like California). Also note, if you are using the ShipCompliant tax return for your home state, you may need to supplement it before filing with sales information that was not processed in ShipCompliant, such as sales made for on-premises consumption or tasting room sales that the consumer did not have direct-shipped to their home.
Q: Is it $100K “and” 200 transactions or $100K “or” 200 transactions……or does this just vary state to state with the “and” or “or?”
A: Indeed, economic nexus thresholds vary by state. While a good number of states have enacted a $100,000 gross sales OR 200 separate transactions standard, this is far from universal. In some states, the sales and transaction standards are connected with an “and” rather than an “or.” And, as we mentioned in the webinar, states are tweaking their standards as they determine what best makes sense for them. Here is a link where we track state economic nexus requirements.
Q: If a business has current nexus in a few cities in Texas, can it apply or should it apply to collect the simplified local tax of 1.75% for the rest of the cities?
A: The Texas simplification is intended for sellers who do not have any physical nexus in Texas whatsoever. If your organization has physical nexus in several Texas cities today, it would appear to us that you would not be eligible to participate in this program.
Q: Is sales and use tax only for Direct to Consumer or does it apply to wholesale sales as well?
A: I think you are referring to how states count sales and transactions for their economic nexus thresholds. If so, the answer varies from state to state. Some states count all sales, while others count only retail sales and still others count only taxable sales.
Marketplace questions related to South Dakota v. Wayfair
Q: How are purchasers and marketplace sellers able to limit the sales to “retail sales” under the facilitator collection rules? Can purchasers provide an exemption certificate to avoid tax collection on a transaction?
A: This is a toughie. If I read your question correctly, I think you are stating that a marketplace is collecting on your behalf, and in some cases they are collecting on wholesale transactions. This is precisely one of the kinks that need to be worked out in a world where someone other than the seller is acting as the tax collector. For me, the simple answer would be that as a collecting facilitator, they should be able to recognize non-taxable wholesale sales and not apply tax. But in so doing, I would also suspect that you, as a seller, would be required to signal that you have a valid certificate for the customer. Further, I wouldn’t be surprised if the marketplace requested a copy.
Q: Is Winedirect a marketplace?
A: No, Winedirect is a fulfillment house, meaning they facilitate the process of shipping wine direct to consumers by storing your wine and packaging it for delivery by a carrier when it is ordered by the consumer. A marketplace is a system where consumers can go to shop for products and make purchases from a number of potential sellers — the iconic marketplace is Amazon, which provides an entire ecosystem for consumers to interact with merchants. Even if Winedirect helps you set up a website or a POS system, they themselves are not a marketplace, and so will not be responsible for any tax collection or remittance.
Q: If the marketplace facilitator is already collecting tax, does the taxpayer need to include the amount reported by the marketplace facilitator in determining the threshold of filing and the return they file?
A: This is one of those open questions across the country. Some states are very clear that transactions where a marketplace is collecting should not be counted against the relevant threshold. Other states are clear that ALL sales are counted, but right now many states have not even considered the question.
Q: The problem with marketplaces is that the seller has to use the tax categories the marketplaces have available. If the seller has a product that does not have a good tax category, the tax isn’t correct. There are also some marketplaces that don’t have ANY tax categories and either tax everything or nothing. Some of the marketplaces also have the seller submit the rate they want to charge, and they do NOT have the ability to calculate local taxes.
A: I completely understand your concern, and we are hearing the same thing. In order for marketplace facilitator collection rules to serve as a long-term answer, facilitators must be held to the same accuracy standards as their clients. What complicates matters is that it remains completely unclear whether a marketplace seller could conceivably be held liable for a calculation error made by the marketplace.
Q: Does the marketplace seller collect state sales tax even if the seller does not meet the threshold?
A: This is an interesting question because the rules vary by state, but from what we understand a lot of marketplace sellers, once they become required to collect, are collecting for all their clients, regardless of whether those clients have, crossed the threshold.
Q: Do you see the states auditing Amazon FBA sellers for past sales tax due besides California, Massachusetts and Washington? Or just by random audit?
A: If you mean based on a retroactive application of economic nexus standards to points in time before the Wayfair decision or before their economic nexus standard became official – no. That is not likely to happen outside Massachusetts which still contends that their cookie nexus standard was legitimate pre-Wayfair. However, if you are asking about past liability from the time a state enacts an economic nexus standard, then some audit liability is possible. During this last year, I think it’s fair to say that states were focused on absorbing taxpayers as they registered. However, as more time passes between the effective date of an economic nexus standard and the day a company decides to register, a state review of whether a particular seller should have registered earlier is certainly possible.
Q: Do you see that those Amazon FBA sellers with stock on Thorton and Aurora need to register for a local sales tax permit?
A: While I cannot comment on your particular business circumstance, it would seem to me that holding inventory in the self-administered cities of Aurora and Thornton would trigger a registration and collection obligation there.
Wholesaler questions about South Dakota v. Wayfair economic nexus
Q: I am a wholesaler of tangible goods. Most of my customers are resellers, but we do have some that are not and we understand that if economic nexus is true that we will need to collect sales tax. The question for us is if our customer is in one state/district but we ship to another location, which sales tax do we collect? Based on buyer’s location or delivery location?
A: In most states, if a taxable good is being shipped from out-of-state, then the proper taxing location would be the “Ship To” location as opposed to the “Bill To” location. In fact, every member state of the Streamlined Sales Tax Agreement adheres to the following rule: “When the product is not received by the purchaser at a business location of the seller, the sale is sourced to the location where receipt by the purchaser (or the purchaser’s donee, designated as such by the purchaser) occurs, including the location indicated by instructions for delivery to the purchaser (or donee), known to the seller.”
Q: If you register in the state can they go back from previous years?
A: It’s pretty much universally true that most states, in enacting economic nexus standards, specified that they would not attempt to apply this standard retroactively. Hawaii was a bit of a hold out, but even they ultimately decided that retroactive application would be a bad idea. Of course, at this point, many states have had standards on the books since 2018 (Massachusetts has had a “cookie nexus” standard on the books since 2017). So, I can’t say it’s impossible that if you register in a state today that they might not seek retroactive application back to when the standard was enacted in that state – assuming you had already crossed the threshold then.
Q: If we already collect sales and use tax in some of these states, do we need to change anything?
A: Generally, no. If you are compliant based on your physical presence, economic nexus does not change too much. However, there are two things I would check: In Colorado, you may want to determine if you are collecting in all state-administered localities and in California, you may want to check if you are collecting in all districts (assuming you have more than $500,000 in sales).
Q: Is there a chart available for remote sellers in the state of Colorado of state collected state, county and city sales tax rates?
A: There is no chart – but the DR 1002 – lists all state-administered localities.
Income tax question for South Dakota v. Wayfair
Q: Have you noticed states making inquiries about income taxes as a result of registration for sales taxes? Q2: Will this trigger state income tax?
A: Not yet, but it’s definitely possible. Today, income tax nexus requirements and sales tax nexus requirements in a given state may not necessarily align. Over time, we would not be surprised to see them aligning. And, over time, we would not be surprised to see states take action to ensure remote sellers are collecting other taxes (e.g. B&O, Commercial Activity, etc.) if they are required.
A2: Not necessarily. Right now, income tax nexus standards and sales tax nexus standards may not necessarily match each other precisely. However, over time, it seems reasonable to expect that in at least some states, they will align to each other.
Q: Could Chuck comment on non-state administered Colorado jurisdictions in light of Wayfair?
A: For certain, under the Colorado state rule, remote sellers are not obligated to collect tax in any self-administered/home rule jurisdictions. Further, right now, we are not aware of any self-administered/ home rule localities enacting their own economic nexus standards.
Q: What are the implications of having nexus in a jurisdiction but having no taxable sales? Are there substantial penalties for not being registered and filing?
A: Technically, yes. If an economic nexus threshold is based on gross sales then a seller may be in a situation where they need to register and report their exempt sales (i.e. file a zero return), and there are indeed separate penalties for “failure to file.” But, I can see seller making the rational business decision to not spend their compliance efforts on registering and reporting only exempt sales.
Q: The simplification rules are great for retailers not located in those states, but navigating all of the local requirements are challenging for the other retailers. Are there any matrices available for those states that have locally administered taxes? Some localities are requiring registration even though there is no physical presence while some are not (for example, Colorado).
A: Apologies, I am not quite sure what you mean with respect to matrices. However, generally when a state has locally administered jurisdictions within their boundaries, they take a “hands off” approach to those jurisdictions. Meaning they feel that they are expressly unable to provide any guidance related to those localities whatsoever. Please feel free to inquire with more details at firstname.lastname@example.org and mention this question from the webinar for me to review again.
Q: Do Louisiana parishes and cities have remote seller requirements?
A: At this time, local taxing authorities in Louisiana (parishes and cities) do not have their own remote seller requirements. Presently, qualifying remote sellers would collect a combined state and local flat rate on sales into the state in lieu of standard local tax. However, it is anticipated that remote sellers will need to begin collecting at the standard state and local rates sometime in the coming year. For more information, please feel free to review the Sovos blog about Louisiana state sales tax.
Q: If a state has a transaction threshold and drops it, do you need to track if you pass that threshold but it changes and you have not registered? Do you believe you can wait until you pass the threshold for sales only?
A: I think I understand your question, but let me paraphrase. I think you are suggesting that your organization may have been required to collect tax under a state’s original threshold but not required under a revised threshold – with the question being whether you have any past liability for the period of time you were technically required to collect. I think the answer is yes, but I could see a business making the rational decision to accept that risk and register once they cross the revised threshold.
Q: Can we withdraw in a state now that they have changed their threshold and we no longer meet the new threshold?
A: Indeed, many states, when they reduce their thresholds, provide details on how sellers who are no longer required to collect may effectively “de-register.” However, if you believe that you may (in relatively short order) cross the new threshold, you may rationally opt to stay registered and continue collecting.
Q: Are not all commercial users expected to self-assess, report and remit their own local and state taxes, especially if they purchase material from a foreign country? This would assume foreign suppliers therefore would not have to register, charge or remit state taxes, as they do not deal with any individuals.
A: It’s indeed the case that foreign (non US) sellers are subject to the same economic nexus standards as US sellers, meaning a foreign seller is required to collect and remit once they cross the threshold. In fact, we know that many non-US sellers are now recognizing this requirement and opting to register and collect on taxable sales. However, regardless of economic nexus standards, it remains the case that purchasers have a use tax liability in cases where the seller failed to collect or was not obligated to collect.
Q: If the minimum sales level is reached in one year in any particular state and then not reached in the following years, what is a foreign supplier expected to do as far a registering and continuing to report to any particular state?
A: Many states, when they reduce their thresholds, provide details on how sellers who are no longer required to collect may effectively “de-register.” However, if you believe that you may (in relatively short order) cross the new threshold, you may rationally opt to stay registered and continue collecting.
Join us again July 25 for an updated, encore presentation of “South Dakota v. Wayfair One Year Later: Retrospective and Look Ahead.” and be prepared for changes ahead.