When the U.S. Supreme Court evaluated the South Dakota v. Wayfair case, the Court found that South Dakota’s sales tax system contained several features that prevent an undue burden on interstate commerce. As a result, features found in South Dakota’s economic nexus legislation like the safe harbor threshold and no retroactive tax collection were broadly implemented in other states’ economic nexus legislation.
Not every state with economic nexus legislation has a sales tax system that exactly mirrors the South Dakota model but have largely proceeded without challenge due to certain uniformities in place. However, there are a few outlier states that experts have concern about when it comes to creating an undue burden for remote sellers: the home rule states.
Home rule states allow local jurisdictions like counties and cities to enact and administer their own sales and use taxes. If you establish nexus in a home rule jurisdiction, you must register in that locality and file separate returns from the state. Unsurprisingly, this makes compliance super tricky in these states!
Home rule states recognize that if each home rule jurisdiction enacted its own form of Wayfair legislation it would be a nightmare for remote sellers. Therefore, each home rule state has taken steps towards simplification for remote sellers, and in some cases, in-state sellers, post-Wayfair.
Let’s take a look at three of the primary home rule states that also have a state-wide sales tax—Alabama, Colorado, and Louisiana—to understand steps taken what remote out-of-state sellers can expect.
Even before the Wayfair decision, Alabama took steps to simplify compliance for remote sellers by establishing its Simplified Sellers Use Tax (SSUT) program. The program allows eligible sellers to collect, report and remit a flat 8% sellers use tax on all sales made into Alabama effective October 1, 2015.
A separate registration election is required for the SSUT program, but once accepted, sellers will not have to separately register or file with the home rule localities. This is a significant administrative relief. Additionally, sellers participating in the program shall not be subject to audit or review by any Alabama locality, only the Department of Revenue.
In order to be eligible for the SUT program, you cannot have physical presence in Alabama at the time of registration; or, according to Will Thistle of Bradley Arant Boult Cummings LLP, a law firm based in Alabama, a SSUT registration may still qualify if some physical presence is established after the SSUT registration.
Alabama’s economic nexus standard is $250,000 retail sales threshold at the state level. This varies from the local nexus standard which continues to be based on physical presence. Thistle has noted that Alabama localities may believe they are not getting the part of the 8% flat rate they deserve. He stated he would not be surprised to see localities make a challenge that economic nexus applies at the local level.
Colorado is notorious for being a difficult state to deal with when it comes to local tax. Following the Wayfair decision, simplification efforts have cropped up across the state but confusion for taxpayers trying to figure out home rule requirements remains a constant.
Colorado codified its economic nexus ruling and established marketplace facilitator collection requirements at the state level in 2019 with H.B. 1240. However, these provisions did not apply to home rule authorities. For home rule localities to enforce economic nexus for their locality, they must pass legislation to conform with the state-level Wayfair provisions. Most experts believe they must also elect to participate in the new centralized electronic sales and use tax system, SUTS (Sales & Use Tax System).
To promote consistency among local home rule legislation, home rule municipal tax professionals, along with the business community and the Colorado Department of Revenue, developed the Colorado Municipal League (CML) Model Ordinance on Economic Nexus and Marketplace Facilitators in early 2020. The Model Ordinance gives municipalities standard definitions to adopt to minimize complexity for taxpayers doing business in Colorado home rule municipalities. The Model Ordinance includes a definition of economic nexus that is consistent with Colorado’s Rule 39-26-102(3) “Doing Business in This State.”
Over half of the 70 home rule municipalities have adopted the Model Ordinance. The CML asks on its website that municipalities that do not want to join the SUTS do not adopt the Model Ordinance and move forward with voluntary compliance. The CML further states that “the risk of a lawsuit under the United States Commerce Clause if you were to enforce economic nexus without the single point of remittance is high. Using the single point of remittance portal and uniform language will assist in lessening that risk, although not removing it entirely.”
Forty-nine home rule jurisdictions have opted into the SUTS system as of November 2021, and 8 more have signed on and are in the onboarding process. Increasing home rule participation in SUTS takes some of the compliance burden away from taxpayers as the system allows taxpayers to file a single remittance that goes to multiple jurisdictions.
Until there is full home rule participation in SUTS, uncertainty remains as to whether collection is required in the participating home rule authorities for sellers who have not converted to the SUTS system.
There is good news for future simplification efforts, legislation in 2020 extended the Legislative Sales & Use Tax Simplification Task Force for five additional years and expanded the scope of sales and use tax issues for the task force to review. Here’s to further home rule headache reduction in Colorado!
Stacey Roberts of TaxOps, a tax consulting firm based in Colorado, sums up the current situation for sellers, “As of today, just because a taxpayer receives a notice from a Colorado home rule city imposing Wayfair nexus does not necessarily mean it is enforceable. The nexus rules for home rule cities in Colorado are confusing and in a current state of flux.”
Louisiana established the Louisiana Sales and Use Tax Commission for Remote Sellers in response to the Wayfair decision to serve as the sole entity in Louisiana to collect and remit sales and use tax from remote sellers. All Louisiana localities participate, and tax is remitted directly to the Commission instead of the Louisiana Department of Revenue.
Effective July 1, 2020, remote sellers are required to collect all home rule taxes at full rates and follow local taxability rules. Previously, remote sellers could collect and remit sales and use tax at a combined flat rate. The flat rate option was eliminated for remote sellers that exceed Louisiana’s economic nexus thresholds.
While this effort is a step in the right direction for remote sellers, the state legislature recognized further simplification and centralization efforts are needed for sellers that have physical nexus as well. Sellers with physical presence through activities like having an employee, representative, or salesperson in the state or storage of property in a third-party facility are currently required to remit taxes to each individual parish (Louisiana’s equivalent of a county). That in of itself is a compliance nightmare, amplified by the fact that each parish may have its own sales tax base.
“While businesses and their advisors are still trying to determine how complex a taxing system must be before it creates an undue, and therefore, unconstitutional, burden on interstate commerce,” said Jaye Calhoun of Kean Miller LLP, “local governments in Louisiana would much prefer to continue self- administration and collection with all the complexity and idiosyncrasies that this entails.”
Calhoun believes home rule locals have a “healthy distrust” of handing over tax administration duties fully over to the state government and some resent having to sacrifice a portion of collection to cover the costs of administration at the state level. However, Calhoun states “there is more money to be collected to the extent the system is simplified and, arguably, less threat to the locals’ ability to collect and therefore Louisiana has been taking tentative steps toward simplification.”
The most recent major simplification effort was a constitutional amendment the Louisiana legislature placed on the November 13, 2021 ballot that would give the legislature the authority to create a State and Local Streamlined Sales and Use Tax Commission. The new Commission would allow remote sellers and in-state sellers to remit tax to a single tax authority.
Voters rejected the amendment, with 52% opposing the proposal to centralize the sales tax system. Critics of the amendment, including New Orleans Mayor LaToya Cantrell, argued it would hold up sales tax revenue distribution to localities due to state bureaucracy and politics.
It’s clear that home rule states have made an effort to mitigate the compliance burden for remote sellers. However, complexities and unanswered questions remain. Can home rule locals meet the constitutional challenges laid out in the Wayfair decision if they continue to self-administer local tax? Will further simplification efforts be made to help out-of-state sellers and marketplace facilitators that have some kind of physical presence in a home rule state navigate the intricacies of complying with individual home rule authorities?