A whirlwind of sales tax changes have swept across the Western region of the U.S. following the Wayfair decision. From novel approaches to economic nexus to shifting thresholds – keeping up with changes for remote sellers is no easy feat in the wild west. However, if your company makes sales to Western states, you are tasked with just that.
The unique sales tax context of each Western state has produced varying approaches to Post-Wayfair legislation. Let’s dive into five not-to-be-missed ways Western states have responded to the Wayfair decision so you can keep your compliance efforts for the region up to speed.
In December 2018, the California Department of Tax and Fee Administration announced that out-of-state retailers that exceeded the state’s new economic nexus thresholds would be required to collect California use taxes on their sales into the state. It took a few months for the legislature to get organized and finally enact highly anticipated legislation on April 25, 2019 that raised the state’s economic threshold to $500,000 from the previous $100,000 or 200 transactions threshold, effective April 1, 2019.
A retailer that, in the preceding or current calendar year, has total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer that exceed $500,000 has economic nexus and must register.
The state’s legislation also applies to marketplace facilitators, who now have the responsibility to collect and remit tax on California sales on behalf of their sellers. However, marketplace sellers with inventory in stored in California by the marketplace facilitator may be “engaged in business” due to physical nexus and may be required to register even if their sales are below the threshold since they have physical nexus.
In acknowledgement of this issue, the CDTFA created a relief program that limited the assessment lookback period and waved penalties for that period for marketplace sellers that only have nexus in California due to inventory stored there by the marketplace facilitator. The program ended on September 25, 2019. It will be interesting to see if other states adopt similar programs.
Alaska does not have a state level sales tax, but municipalities have the authority to impose local sales taxes. Following the Wayfair decision, many local government leaders hope to capitalize on the benefits remote seller tax collection presents. The city of Nome, Alaska made the first move with a city ordinance.
Effective September 1, 2019, remote sellers and marketplace facilitators have economic presence in Nome, if in the previous or current calendar the seller’s gross revenue into the state exceeds $100,000 and is made in more than 100 separate transactions.
On a broader level, the Alaska Municipal League (AML) announced a plan in October 2019 to establish an intergovernmental entity, the Alaska Remote Seller Sales Tax Commission, to enable centralized administration of remote sales tax collection, remittance, and enforcement. The AML would adopt a threshold of $100,000 or 100 annual transactions occurring in Alaska in the previous or current calendar year. Cities and boroughs are being asked to join this cooperative agreement.
If you have sales into Alaska that exceed the proposed economic thresholds, tax registration and remittance could become a lot easier if municipalities adopt the AML agreement, as you’d only have to deal with one entity.
Colorado’s economic nexus ruling became effective December 1, 2018. However, the Colorado Department of Revenue decided to implement a grace period through May 31, 2019 for remote sellers to ensure the sellers had sufficient time to make potentially complicated systems changes to start tax collection in Colorado. But, if you weren’t collecting the tax, you were still subject to the notice and reporting requirements that were originally passed in 2010 and delayed until 2017 after the case had a hearing at the U.S. Supreme Court. Justice Kennedy made the strong suggestion in this case that it was time for the states to challenge the Quill decision and physical presence!
The state originally rolled out economic thresholds of $100,000 or 200 transactions. However, in April of 2019, Colorado eliminated its number of transactions threshold, leaving only the $100,000 to determine substantial nexus for remote sellers. The transaction threshold removal is part of a larger movement in the state to simplify state and local sales and use tax collection and remittance.
The Colorado tax system is notoriously complex. Post-Wayfair, legislators passed a bill to require development of an electronic sales and use tax simplification system to help the DOR process and administer state and local taxes. The Sales and Use Tax Simplification Task Force meets to carry out the mission.
Part of what made economic nexus implementation more complex was the requirement to collect sales tax and not seller’s use tax. This adds in the requirement to collect all the state administered county, city, and special purpose taxes. The only good news out of Colorado is the state agrees that the home rule cities have no authority to require collection under economic nexus – not that they aren’t trying!
Arizona’s economic nexus ruling became effective October 1, 2019. Remote sellers are required to register with the state, if in the previous or current calendar year, they have gross proceeds from Arizona customers that exceed:
Arizona is the only state thus far to use a graduated approach for their economic nexus threshold for individual remote sellers. There is a separate non-graduated threshold of $100,000 for marketplace facilitators. Make sure to adjust your tracking process/mechanism on a yearly basis to accurately determine if you exceed Arizona’s threshold for the year.
Another unique aspect of Arizona’s ruling is that remote sellers are required to collect Transaction Privilege Tax (TPT) not seller’s use tax. TPT is a tax on the privilege of conducting business in Arizona and is levied on seller income. Arizona does allow home rule authorities but made the Arizona Department of Revenue the single point of administration and collection of TPT, effective January 1, 2017. This means remote sellers do not have to file TPT returns with local jurisdictions, just with ADOR. Also, since it is TPT that has to be collected, all the local taxes apply – not just the state rate like under seller’s use tax.
Like Colorado, Washington decided to eliminate its transactions threshold, effective March 14, 2019. Only for the period October 1, 2018 (when the state’s economic nexus legislation went into effect) through December 31, 2019 did sellers with 200 or more separate transactions into Washington have to collect. Today, remote sellers and marketplace facilitators that have $100,000 in annual gross retail sales Washington consumers in the current or prior calendar year must register with the state and collect and remit tax.
Economic nexus is not a new tax collection tactic in Washington. Economic nexus for business and occupation (B&O) tax in Washington predates the Wayfair decision and economic nexus for sales tax. However, Wayfair did shake up the state’s approach to other types of remote seller nexus legislation. Washington repealed its click-through nexus provisions, eliminated the option for sellers to comply with notice and reporting requirements, and lowered the threshold for B&O tax to $100,000 for 2020 in the past year.
Despite the elimination of the notice and reporting vs. collection option, sellers still have liability under the provisions for the period January 1, 2018 through June 30, 2019 if they exceeded the applicable thresholds. We recommend that sellers with this type of prior tax obligations take advantage of the state’s voluntary disclosure program, especially if you now need to register due to economic nexus. The penalty for not complying is steep – $20,000! Participating in the VDA program can get that waived, and there are some other benefits if you exceed the economic threshold and need to remit tax back to October 2018.
These five changes only skim the surface of the recent sales tax developments in the Western part of the country. It is a stress-inducing process to make the necessary changes to get in compliance after the fact if you’re unaware of the significant changes happening in this region on a daily basis.