How Sales Tax Has Evolved for Online Sellers (And What is Coming Next)

One of the most important (and potentially nerve-wracking) developments in sales and use tax over the last several years is the evolution of how states are targeting online sellers. And for good reason… there’s a lot at stake here.

According to a recent report by the U.S. Government Accountability Office (GAO), state and local governments could see an additional $8 billion to $13 billion annually if states can require all remote sellers to collect sales tax. Or, in other words, online sellers can expect to pay a lot more to states in taxes in the future than they currently are.

That’s serious money! When state governments see a potential revenue stream of that magnitude, they will look into their options to get a hold of it as quickly as possible. And in 2018, there are many options at their disposal.

For the last decade, states have enacted different types of nexus legislation targeting remote sellers such as online sellers. The five different types of legislation are:

• Click-through nexus
• Affiliate nexus
• Economic nexus
• Marketplace nexus
• Use tax notice and reporting requirements

For more information on these types of legislation and to see which states have enacted each type, visit the Sales Tax Institute’s Remote Seller Nexus Chart.

The types of sales & use tax legislation that have been most commonly enacted over the last 2 years are economic nexus, marketplace nexus, and reporting requirements. And it doesn’t appear that this trend will be abating anytime soon.

These three types of legislation are particularly important for online sellers to be aware of since they are specifically targeted at out-of-state sellers making sales into a state. If a state enacts one of these types of legislation, it can mean you need to collect and remit sales tax in that state or administer onerous notice and reporting requirements.

With that in mind, let’s take a look at what’s in store for online sellers in the near future with our top three predictions.

Prediction #1: States Will Continue to Pursue Online Sellers Through Marketplace Providers

A very recent trend is state departments of revenue pressuring online marketplace providers to provide them with information on marketplace sellers who have inventory in the state.

Enacting legislation to compel online sellers to register to collect and remit sales tax on their sales is one thing. Going directly to source – such as Amazon – to get lists of online marketplace sellers is entirely another.

Last year, Massachusetts decided to play hardball and ordered Amazon to provide the state’s Department of Revenue a list of third party sellers who have inventory in Massachusetts warehouses. Amazon eventually complied and agreed to turn the information over to the Massachusetts Department of Revenue.

What will happen now that Massachusetts has this information is yet to be seen. We’ll be monitoring the situation for developments, but Massachusetts isn’t the only state to do this.

South Carolina filed a suit against Amazon for the collection of tax on all third party sales. In this case, South Carolina is not planning to pursue the 3rd party sellers. Rather, they are attempting to hold Amazon responsible for collecting tax on all sales executed on its portal – including sales by third party sellers. The initial assessment for just one quarter in 2016 was $12 million. The case is still pending but the South Carolina Court did not grant the Department of Revenue’s request for an injunction to force Amazon to collect the tax pending the outcome of the case.

We have also heard that California and Washington have contacted FBA (Fulfillment by Amazon) sellers.

We fully expect this trend to continue across the country over the coming year, especially as states are successful in getting the information.

Prediction #2: More States Will Introduce Marketplace Nexus and Reporting Requirements Legislation

As mentioned above, states have introduced and enacted marketplace nexus and use tax notice and reporting requirements legislation increasingly over the last several years. Online sellers need to expect this trend to continue in 2018.

Specifically, expect to see more states introducing and enacting marketplace nexus legislation similar to what Washington enacted in 2017.

Per the Washington legislation, effective January 1, 2018, remote sellers, referrers, and marketplace facilitators must either collect and remit Washington sales or use tax on taxable sales into Washington or comply with notice and reporting requirements. The requirements apply to remote sellers or marketplace facilitators with gross receipts from retail sales sourced to Washington in the current or preceding calendar year of at least $10,000.

You will likely see more of this type of legislation soon. Especially since Amazon, Etsy and Walmart have now agreed to collect the Washington tax on behalf of all third party sellers into the state.

Additionally, expect to see more states introducing and enacting use tax notice and reporting requirements legislation over the coming months. This legislation doesn’t require the seller to collect the tax. Rather, the seller is required to notify customers of their use tax liability. And to make sure that tax can be collected – to notify the state of all their customers in the state. And states may follow Pennsylvania’s lead which requires marketplace sellers to provide the state with the list of all the third party sellers on its platform. The notice and reporting requirements are often more burdensome than just collecting the tax – which of course is what the states are hoping sellers will elect to do in lieu of complying with the notice requirements.

It looks like the days are numbered until remote sellers have some sort of tax collection or reporting requirements obligation in every state. The big question is: will the U.S. Supreme Court be the deciding factor? Which leads us to…

Prediction #3: South Dakota v. Wayfair – Who Knows???

On January 12, 2018, the U.S. Supreme Court agreed to hear South Dakota v. Wayfair, a very important court case regarding sales tax obligations for remote sellers.

Here is a brief summary of what went down:

1. In March 2016, South Dakota enacted economic nexus legislation, effective May 1, 2016, that added sales and use tax collection requirements for remote sellers who meet certain sales thresholds and makes sales into South Dakota.
2. One year later, in March 2017, the South Dakota Sixth Judicial Court ruled that the legislation is unconstitutional. After an expedited state hearing process and submission of numerous Amicus Briefs, the U.S. Supreme Court agreed to hear the case on January 12, 2018.

The issue at hand is whether South Dakota’s economic nexus legislation violates the Commerce Clause of the U.S. Constitution and the precedent the Supreme Court set in Quill Corp. v. North Dakota back in 1992.

The Quill ruling didn’t account for the current landscape of internet sellers, and many believe that this is a long overdue reconsideration of that decision. What the Supreme Court decides on this case could have a seismic impact on sales and use tax in the United States.

We could have a decision from the Supreme Court by the end of June, but it may take longer than that. The options for the Court are many and until they rule, it is expected states will continue to pass remote seller legislation.

It is because of this that I expect to see a number of economic nexus rules proposed and enacted. If the Court finds in favor of South Dakota it could validate the economic nexus legislation and therefore, other states will want to have similar legislation on their books to be able to immediately enforce the legislation.

We always monitor all of the latest developments regarding sales tax for online sellers. To stay up to date, make sure to bookmark our Remote Seller Nexus Chart and check back regularly. And if you don’t already, follow us on Twitter, where you can get the most recent updates as developments happen.