Thanks to Jack Schmoll, CPA for providing this information regarding sales tax nexus
We are seeing some of the most dramatic sales tax nexus changes ever. Some states are now deeming businesses to have sales tax nexus simply by the volume of sales in their state and Colorado is enforcing burdensome reporting requirements on businesses without sales tax nexus.
For years, we have been able to rely on the US Supreme Court’s ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) to provide some measure of protection from sales tax collection requirements. However, ever since Quill was decided, the states have been trying to find a way to overturn the case. The State’s latest tactic is to blatantly violate the ruling in Quill in hopes to get the Supreme Court to overturn its prior ruling.
The state's motivation is Justice Kennedy, who has indicated that Quill may be old law and it may be time to overturn the case. The goal of these states is to become involved in a lawsuit that will rise to the Supreme Court and overturn Quill.
A handful of states have passed laws or taken administrative positions, that deem a business to have sales tax nexus based solely on the amount of sales into the state or the number of transactions in the state. For example, effective July 1, you are deemed to have Wyoming sales tax nexus if sales exceed $100,000 or total transactions exceed 200 per year in Wyoming.
It is likely that other states will adopt similar language, and enforcement of the new requirements will vary by state, depending on the disposition of various lawsuits. For example, Tennessee was sued prior to the effective date of its statute and there is currently an injunction in place preventing them from enforcing the law.
This is likely to be a moving target for some time, but one that needs to be very closely monitored by anyone whose clients are selling online. If a business unwittingly establishes nexus because of these new threshold requirements, they could quickly amass a very large contingent liability.
Colorado Use Tax Notification
Effective July 1, 2017, very onerous reporting requirements on sellers without nexus will become effective in Colorado. These requirements were to be effective in 2010 but were postponed until legal challenges were resolved.
In many ways, the reporting requirements placed on sellers without nexus are more complex and difficult than just collecting tax. Non-collecting (non-nexus) retailers with over $100,000 of Colorado sales are required to:
- Inform all Colorado customers they may have a use tax liability;
- Send detailed annual purchase summaries to all customers that purchased over $500 of taxable items and remind them use tax may be due; and
- File an annual report with the Colorado Department of Revenue providing a list of all customer names, addresses, and total purchase amount.
Non-compliance penalties can add up very quickly. For example, failing to notify a purchaser of potential use tax liability generates a $5 penalty per transaction.
Since the US Supreme Court has tacitly approved these requirements, several states are actively considering similar statutes. I expect that many sellers will simply begin collecting tax instead of dealing with the administrative burden of the non-collecting reporting requirements.
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