There has been a lot of focus recently on remote seller nexus and collection responsibility. The MTC Online Seller Amnesty program has brought this issue to the forefront. But what hasn’t gotten as much attention is the Notice and Reporting legislation.
Reporting and notice requirements legislation isn’t a new trend in sales and use tax. In fact, it’s been around since 2010, when Colorado was the first state to enact this type of legislation, originally effective March 1, 2010 but later postponed (more on that in a bit). Some states followed suit over the years, enacting their own legislation, but it was sporadic and not widespread.
In 2017 however, reporting requirements legislation has suddenly become a big deal. The following states have each enacted their own reporting requirements legislation with a 2017 or 2018 effective date: Alabama, Colorado, Louisiana, Rhode Island, Vermont and Washington.
So what’s the reason for all of this sudden activity? It all comes back to Colorado’s pioneering legislation and the circuitous route it took to becoming enacted. It started back in 2010 with Colorado deciding not to enact remote seller collection legislation such as click-through or affiliate nexus, but rather enacting a new kind of legislation.
The new “reporting requirements” legislation required out-of-state retailers that do not collect Colorado sales tax to notify Colorado customers of their obligation to self-report and pay use tax, provide their Colorado customers with an annual report detailing the customer’s purchases from the seller in the prior year, and provide the Colorado Department of Revenue with an annual report including the name, address, and total amount of purchases for each of their Colorado customers. This law did not require these out of state retailers to collect the tax.
It didn’t take long for the legislation to be challenged in court as unconstitutional. By January 2011, an injunction was issued prohibiting Colorado from enforcing the reporting requirements. The case then wound its way through the court system over the years, all the way up to the U.S. Supreme Court to decide if the law could be heard in federal courts rather than state courts. This decision was rendered in March 2015. The case then proceeded in the Appellate Court of the 10th District. On February 22, 2016, the U.S. Court of Appeals for the Tenth Circuit ruled the reporting requirements constitutional. The decision was appealed and in December 2016 the U.S. Supreme Court declined to review the ruling of a lower court. As a result, the legislation was found to be constitutional and Colorado was allowed to enforce the reporting requirements. Through a settlement with the Direct Marketing Association (the party who brought the case), Colorado agreed to only enforce the law prospectively starting July 1, 2017 rather than since it was enacted in 2010. These removed the risk of significant penalties for unregistered sellers for non compliance.
Once it was decided that the Colorado legislation was constitutional, we saw a flurry of states enacting their own reporting requirements legislation, each with their own nuances. For instance, some of the states have built in (not insignificant) penalties for non-complying remote sellers. Rhode Island’s legislation includes 5 separate requirements that non-collecting individuals must comply with. Each requirement carries a minimum $10,000 penalty per calendar year. Which means a minimum $50,000 penalty for any non-collecting retailer, referrer or retail sale facilitator!
It is some small relief that states have built de minimus sales threshold exceptions into their legislation. These rules typically apply based on taxable sales into the state. If all your sales are exempt (and you have the proper exemption documents if required), then you are likely not required to comply. See below for the threshold for some of the states that have enacted reporting requirements legislation:
If your sales do exceed the thresholds, you may have options. If you don’t have nexus in a state with reporting requirements legislation, you may choose to register to collect and remit sales tax in the state, so you don’t have to comply with the reporting requirements. (Of course this is what the states are hoping!). It is something to consider as the reporting requirements can be more burdensome than collecting. One of the common requirements in the states is web page language and invoice language. If you sell on a marketplace portal, you may not be able to comply with these requirements.
If you need to stay on top of which states have enacted reporting requirements legislation (and other types of remote seller nexus legislation), we’ve created a one-stop resource. Our Remote Seller Nexus Chart lists each state that has enacted each type of remote seller nexus legislation, along with the effective date for the legislation and links to our relevant news items with more details. This is an invaluable resource, so check it out and bookmark the page for future reference!
We can probably expect to see more states enacting reporting requirements legislation in the near future. We’ll continue to monitor for developments and keep you updated.
Also, as a reminder for online sellers, the Multistate Tax Commission’s online seller amnesty program is taking place until November 1, 2017 (formerly October 17). Click here for more information on the program and how you can get help with the application process.