Oklahoma Ruling on Sales Tax Nexus

On Jan. 7, the OTC issued a letter ruling that addresses whether inventory stored at a third-party marketplace facilitator’s Oklahoma warehouse creates sales tax nexus and a filing obligation for a remote seller. The ruling analyzes Oklahoma’s economic nexus thresholds and a statutory exception for sales made through a marketplace facilitator’s website. The ruling also analyzes when inventory that is owned by a remote seller and stored at a marketplace facilitator’s warehouse in Oklahoma creates physical nexus for the remote seller, requiring the remote seller to register and file sales tax returns on its direct-to-consumer sales that were otherwise below the annual economic nexus threshold.

Background

Since the U.S. Supreme Court’s South Dakota v. Wayfair decision, all states that impose a sales tax have enacted legislation obligating sales tax collection duties on remote sellers based on economic activities within the state.

The rapid growth of marketplace selling has complicated nexus analysis because a seller can have customers in a state without managing fulfillment, warehousing, or local operations in that state. Marketplace facilitators frequently control fulfillment networks and inventory can be located in marketplace facilitator warehouses in multiple states. If a remote seller’s goods are stored in a marketplace facilitator’s warehouse in a particular state, the question becomes whether those goods give the seller in-state physical presence.

Effective Nov. 1, 2019, Oklahoma’s sales tax nexus framework recognizes both economic presence and physical presence as potential nexus creating activities. Generally, a business has economic nexus if taxable sales into Oklahoma meet the statutory $100,000 threshold during the preceding or current calendar year. If a marketplace facilitator is collecting Oklahoma tax on the seller’s behalf, the marketplace facilitator sales are not included in the calculation to determine if the seller has economic nexus. However, if a marketplace facilitator is not collecting Oklahoma tax on the seller’s behalf, those marketplace sales are included in the seller’s threshold calculation, and the seller must collect Oklahoma sales or use tax on its taxable sales made through that marketplace.

Generally, a business has physical presence nexus if it has a physical presence in Oklahoma, such as a retail store, a warehouse, or inventory located in the state. Although inventory located in Oklahoma is a physical presence nexus factor, Oklahoma law provides an exception when the seller’s only in-state presence is inventory owned by the seller but stored in a third-party warehouse over which the seller has no control.

OTC letter ruling

The ruling was requested by a remote seller that conducts online retail sales through its own website and through third-party marketplaces. The seller had no physical location or employees in Oklahoma, and its direct website sales into Oklahoma were below the $100,000 annual economic presence threshold. The seller’s sales through a marketplace facilitator's sites are subject to sales tax, and the marketplace facilitator collects and remits the sales tax on behalf of the seller. The seller owned inventory that could be stored in the marketplace facilitator’s Oklahoma warehouses. The seller did not control or manage where the inventory was stored and the inventory at issue could be used only to fulfill orders placed with the seller through the marketplace facilitator’s site.

The ruling concluded that the seller did not have economic nexus because the seller’s direct website sales were below the $100,000 threshold. The ruling further concluded that the seller did not have physical nexus in Oklahoma because the only physical presence was inventory in a third-party warehouse over which the seller had no control or management authority.

Crowe observation

Based on this ruling, sellers that rely on marketplace facilitators and that claim they have no physical presence in Oklahoma should be prepared to support their position that they have no control or management authority over a marketplace facilitator’s warehouse in Oklahoma.

Even though, under the facts presented, the seller in this case has no sales tax nexus in Oklahoma, the ruling serves to remind sellers that they need to continue monitoring sales to determine whether direct sales through their website hit the $100,000 economic presence threshold.

Looking ahead

For multichannel sellers, the ruling underscores that Oklahoma nexus analysis can hinge on both sales thresholds and operational facts regarding inventory control. For open periods and going forward, marketplace and direct-to-consumer sellers with less than $100,000 of direct Oklahoma sales should evaluate whether any Oklahoma-stored inventory is held solely under third-party control and whether marketplace facilitators are collecting Oklahoma tax on their behalf. Sellers also should review data and processes used to track Oklahoma taxable sales and deliveries across all channels and verify facilitator collection responsibilities under marketplace agreements. Sellers should consult their tax advisers to determine how this guidance could affect their situation.