Several states recently adopted economic nexus provisions requiring out-of-state sellers to collect sales (or use) tax from customers even if the out-of-state sellers do not have physical presence in the state. These provisions challenge the bright-line physical presence nexus standard for the collection of sales or use tax established by the U.S. Supreme Court in 1992 in Quill Corp. v. North Dakota.1
The adoption of these new nexus rules was spurred by Justice Anthony Kennedy’s concurring opinion in Direct Marketing Association v. Brohl in which he suggested that the Supreme Court should revisit the physical presence test established by Quill.2 In Brohl, the Supreme Court held that the Tax Injunction Act did not bar the federal courts from hearing challenges to a Colorado statute requiring out-of-state retailers to notify customers of their sales and use tax requirements and to report tax-related information to customers and to the state. The Supreme Court remanded the case to the appeals court and expressed no view on the merits of the case.
At issue in Brohl was the constitutionality of a Colorado law requiring out-of-state retailers that do not collect sales or use tax on sales to residents to notify customers of their obligation to pay use taxes on their purchases and send the Department of Revenue an annual “customer information report.”3 On Feb. 22, 2016, the 10th U.S. Circuit Court of Appeals upheld the constitutionality of Colorado’s notification and reporting requirements.4 The 10th Circuit concluded that the scope of Quill is limited to the actual collection and remittance of use tax and does not cover notification and reporting requirements on out-of-state retailers. The Colorado law merely imposes differential treatment on those retailers that collect tax and those that do not, and the differentiation is not enough to establish a Commerce Clause violation on its face or to its effect. The court also noted that the notification and reporting requirements do not impose an undue burden on interstate commerce.
Since Brohl, several states, including Louisiana, Pennsylvania, Vermont, and Washington, have introduced bills to create notification and reporting requirements similar to those in Colorado.5
States that have passed economic nexus legislation now impose (or will impose) collection and remittance obligations on remote sellers, regardless of whether the sellers have physical presence in the state, if certain conditions are met. These states include:
- Indiana: For sales of more than $100,000 or 200 or more separate transactions6
- Maine: For sales of more than $100,000 or 200 or more separate transactions7
- North Dakota: For sales of more than $100,000 or 200 or more separate transactions8
- Ohio: For sales of more than $500,0009
- Vermont: For sales of more than $100,000 or 200 or more separate transactions10
- Wyoming: For sales of more than $100,000 or 200 or more separate transactions11
Other states have promulgated regulations or issued administrative directives, with some being challenged in court:
- Alabama: A regulation for performing certain activities in addition to retail sales of more than $250,000 currently is being challenged.12
- Massachusetts: A new economic nexus rule, similar to a previously retracted economic nexus directive, is forthcoming.13
- South Dakota: A $100,000 of sales or 200 separate transaction threshold was challenged and held unconstitutional by a South Dakota circuit court.14
- Tennessee: On April 10, 2017, the Tennessee chancery court suspended enforcement of a regulation for sales exceeding $500,000 during the previous 12-month period15 until the challenges against the rule are resolved.
While the U.S. Supreme Court might find a case worthy of revisiting Quill, remote sellers also should monitor legislative activity at the federal level. The Marketplace Fairness Act of 2017 would allow eligible states to require all sellers, except those who qualify for a small-seller exception (for sellers with $1 million or less in sales), to collect and remit sales and use tax regardless of whether the sellers have in-state physical presence. The No Regulation Without Representation Act of 2017 was introduced in June and effectively would codify the physical presence requirement established in Quill.
Although the new laws and regulations are a direct challenge to Quill, out-of-state sellers are faced with deciding if they should collect sales tax from customers under a provision that ultimately might be rejected by the courts or not collect the tax and face exposure for the uncollected tax if the regulation is upheld by the courts. Complicating matters, some states, along with the Multistate Tax Commission, are discussing an amnesty program to encourage compliance with the new remote seller rules.
1 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
2 Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124 (2015) (Kennedy, J., concurring).
3 Colorado Revenue Statute Section 39-21-112(3.5).
4 Direct Mktg. Ass'n v. Brohl, 814 F.3d 1129 (10th Cir. 2016).
5 For example, Louisiana Act 569 (H.B. 1121), Laws 2016 (effective July 1, 2017); Pennsylvania H.B. 542 (2017); Vermont H.516 (Act 73) (2017); Washington H.B. 2186 (2017).
6 Ind. Laws 20-17, P.L. 247 (HB 1129) (effective on July 1, 2017).
7 Enacted by Maine legislature, L.D. 1405/S.P. 483, Laws 2017 (effective Oct. 1, 2017).
8 These thresholds have a contingent effective date and will become effective on the date that the U.S. Supreme Court overturns the physical presence requirement or otherwise confirms that a state may constitutionally impose sales or use tax under the circumstances set forth in the legislation.
9 Beginning in 2018, Ohio Am. Sub. H.B. 49 requires out-of-state sellers to collect and remit use tax if the seller has at least $500,000 in sales to Ohio customers in the current or preceding calendar year and uses in-state software to sell or lease taxable tangible personal property.
10 Vermont H.B. 873 is not effective until the first day of the calendar quarter following a decision of the U.S. Supreme Court or the enactment of federal legislation abolishing the physical presence requirement.
11 Effective on July 1, 2017, remote sellers are required to collect and remit sales or use tax if they meet the $100,000 of sales or 200 separate transactions threshold. Wy. Ch. 85 (H.B. 19), Laws 2017.
12 Alabama Code Sec. 40-23-68(b). This regulation currently is being challenged in court. See Newegg, Inc. v. Alabama Department of Revenue, Alabama Tax Tribunal, No. S. 16-613 (2017).
13 Massachusetts Department of Revenue Directive 17-1, revoked by Directive 17-2 before implementation, would have established an economic sales tax nexus rule for internet vendors that have more than $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in at least 100 transactions.
14 South Dakota v. Wayfair, Inc., No. 32CIV16-000092 (S.D. 6th Cir. Ct.). A state court granted a motion for summary judgment, holding that the state’s economic nexus provision was unconstitutional. The court noted that “even when changing times and events clearly suggest a different outcome, it is simply not the role of a state circuit court to disregard a ruling from the United States Supreme Court.” This case is being appealed to the South Dakota Supreme Court.
15 Tennessee Revenue Rule 1320-05-01-.129(2) requires out-of-state retailers with no physical presence in Tennessee to register for sales and use tax collection and remittance purposes.