A United States District Court in Colorado recently issued a permanent injunction against the Colorado Department of Revenue from imposing strict notice requirements on out-of-state sellers who do not collect sales tax on internet sales in the state. If the notice requirements would have been allowed, an out-of-state seller who did not collect sales tax and had more than $100,000 in total Colorado gross sales for the prior calendar year would have been required to:
- Provide notification informing each customer:
- The remote seller does not collect sales tax in Colorado,
- The purchase is not exempt from sales or use tax merely because it is made over the internet, and
- Colorado requires a consumer to file a sales or use tax return reporting all Colorado purchases which were not taxed and pay tax on those purchases.
- Provide an annual notice to most Colorado purchasers summarizing Colorado purchases for the preceding calendar year, and
- Provide the Colorado Department of Revenue a purchaser’s billing and shipping address and the total amount of purchases made during the prior year.
The permanent injunction explained the notice requirements violated the Commerce Clause of the United States Constitution by discriminating against interstate commerce and imposing an undue burden. The notice requirements would have applied to out-of-state remote sellers, while in-state remote sellers would not have similar requirements. Arguably, an in-state remote seller would satisfy the physical presence standards1 in the state and likely would have been collecting and remitting sales tax to the State of Colorado. Colorado has filed an appeal on the permanent injunction.
The permanent injunction did not address affiliate nexus statutes currently in place in Colorado.2 Therefore, remote sellers must still consider these statutes when determining the impact of Colorado laws upon their business.
Other states including Oklahoma, South Carolina, South Dakota, Tennessee, and Vermont have adopted notice requirements. The notice requirements adopted in these states are less strict than the requirements determined to be unconstitutional in Colorado, however, remote sellers must determine their proper application. While laws directed at remote sellers continue to be challenged across the nation, state legislatures also continue to propose and enact new legislation.
Georgia aggressively entered the battle against remote sellers by enacting both “click-through” nexus, as well as affiliate nexus statutes.
In Georgia, a remote seller will be presumed to have physical presence using the “click-through” nexus statute if the remote seller enters into an agreement with one or more persons who are residents of Georgia, where the resident refers potential customers to the remote seller by a link on an internet website, an in-person oral presentation, telemarketing, or otherwise, for commission or other consideration. A remote seller must also have more than $50,000 in gross receipts from the agreements with Georgia residents over the last 12 months to satisfy the “click-through” nexus statute. The “click-through” statute enacted by Georgia is fairly similar to other states previously enacting “click-through” nexus. However, Georgia added one nuance by including in-person oral presentations and telemarketing as a source of referral within the presumption.
As part of the same legislation package, Georgia also enacted affiliate nexus. Under the affiliate nexus statutes, an out-of-state remote seller will be presumed to satisfy the physical presence standard, thus being required to collect and remit sales tax, if an in-state affiliate or related member3 sells a similar line of products and does so under the same or similar business name or uses trademarks, service marks, or trade names in the state that are the same or substantially similar to those used by the remote seller.
The legislation also expressly provides that any ruling, agreement, or contract stating that a remote seller is not required to collect sales tax in the state, despite physical presence is now null and void. Remote sellers who previously had such a ruling, agreement, or contract should consider the impact of the legislation to their business.
Tennessee recently used economic development policies to create an exception to the affiliate nexus standards previously adopted.4 The legislation provides, in certain circumstances, the activities of a remote seller’s affiliates (including the sale of tangible personal property for resale and other non-retail activities) are not considered in determining whether the remote seller has a physical presence in the state, assuming the in-state affiliate meets specific requirements. To be eligible for the legislative “safe-harbor” a remote seller must have an in-state affiliate who:
- Places one or more distribution facilities in service, directly or through a third party in the state after January 1, 2011 and before January 1, 2014;
- Makes a capital investment in the state of at least $350,000,000 after January 1, 2011 and before January 1, 2014;
- Creates at least 3,500 qualified jobs in the state after January 1, 2011 and before January 1, 2014, and
- Maintains at least 3,500 qualified jobs in the state until January 1, 2016.
If a remote seller has an affiliate who satisfies the “safe-harbor,” a remote seller may delay the collection of Tennessee sales tax on remote sales until January 1, 2014 or the effective date of a law passed by the United States Congress, whichever is earlier. By using economic development policies, Tennessee is hoping to assist in the creation of at least 3,500 new jobs and also receives an agreement from certain remote sellers to start collecting sales tax on remote sales beginning in 2014.
As part of the legislation package, Tennessee also adopted notice requirements for a remote seller who qualifies under the “safe-harbor.” These remote sellers will have to give notice to Tennessee purchasers of remote sales including:
- An initial email confirmation which must provide:
- The purchaser may owe Tennessee use tax on the total purchase,
- The purchase is not exempt from use tax because the sale is made through the internet, and
- An internet link to the Tennessee Department of Revenue website allowing a person to pay the use tax.
- A year-end summary of the total purchases of tangible personal property made by a purchaser during the previous year.
Interestingly, the year-end summary requirements must be completed for the tax year 2011 and every year thereafter. Thus, purchasers in Tennessee who do not have an applicable exemption and have not paid their use tax liability for 2011 should consider making a payment once the year-end summary has been provided. The Tennessee notice requirements will be repealed the earlier of January 1, 2014, when the remote seller’s affiliate fails to meet the “safe-harbor,” or the effective date of a law enacted by the United States Congress. As discussed above, remote sellers qualifying for this “safe-harbor” will begin to collect sales tax in Tennessee after the repeal.
Virginia also joined in the attack on remote sellers by enacting legislation which creates affiliate nexus standards in the state. In Virginia, an out-of-state remote seller lacking physical presence will be presumed to satisfy the physical presence standard if the remote seller has any commonly controlled person maintaining a distribution center, warehouse, fulfillment center, office, or similar location in the state that facilitates the delivery of tangible personal property sold by the remote seller to its customers. This presumption is rebuttable if a remote seller can demonstrate the activities conducted by the commonly controlled person are not significantly associated with the remote seller’s ability to establish or maintain a market in the state. The standards are effective on September 1, 2013 or the effective date of a law passed by the United States Congress, whichever is earlier.
The legislation enacted in Virginia is similar to other states which have previously enacted affiliate nexus statutes. Thus, remote sellers who have affiliates with physical presence in Virginia should consider the proper application of these standards to their individual facts and circumstances.
What remote sellers should do:
All remote sellers should continue to track these national trends and assess their risk for a state asserting physical presence and retroactive tax collection. Often, steps can be taken to mitigate a remote seller’s risk of being held liable for collecting sales tax on remote sales. Our Multistate Tax team has experience advising and assisting remote sellers with weighing their risks and identifying opportunities to reduce that risk.
1According to Quill Corp. v. North Dakota, 504 U.S. 298 (1992), prior to being required to collect and remit sales tax, a company must have substantial nexus in a state. At a minimum, to have substantial nexus, a company must have physical presence within the state.
2Under the affiliate nexus statutes in Colorado, a remote seller which lacks physical presence in the state will nonetheless be presumed to have physical presence, thereby being required to collect sales tax, if a related or affiliated company has physical presence in the state. To determine if this presumption exists, the state will review the relationship and ownership between the in-state entity and out-of-state remote seller based upon Internal Revenue Code § 1563.
3Under the affiliate nexus statute in Georgia, to satisfy the presumption the state will make a determination by reviewing the relationship and ownership of an in-state entity and an out-of-state remote seller based upon Internal Revenue Code § 1563.
4Under the affiliate nexus standards adopted, Tennessee will review the relationship and ownership between the in-state entity and out-of-state remote seller based upon Internal Revenue Code § 1563.
If you would like to discuss this subject, please contact:
John R. Trippier
Adam L. Garn
Thomas M. Zaino
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. This can be a daunting task. We provide a broad range of state and local tax services including tax planning, tax controversy, real estate tax abatement and exemption, and tax policy advocacy. With professionals who have worked both inside and outside government agencies, the multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.
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