Remote sellers should brace for surge of sales tax reporting laws
The new year will ring in a new chapter in the burgeoning battle over state remote sales taxation with a wave of new notice and reporting laws — but questions remain on how remote retailers can manage the potential legislative onslaught.
In the wake of the U.S. Supreme Court’s turning down an appeal challenging Colorado’s 2010 notice and reporting regime, many expect that states will regard the ruling as carte blanche to adopt similar statutes (Direct Mktg. Ass’n v. Brohl, 2016 BL 411370, U.S., No. 16-267, petition for certiorari denied Dec. 12, 2016).
The Colorado statute (Colo. Rev. Stat. Section 39-21-112.3.5) requires remote retailers not collecting sales tax to report in-state sales to the Department of Revenue and notify customers of their use tax obligations. The law remains under an injunction, and it remains unclear when state officials will seek to lift it.
In the meantime, remote sellers must contend with yet another state strategy to capture revenue lost to e-commerce. The Centennial State’s law was the first of its kind, and already became a model for a small contingent of states that have adopted reporting regimes.
More state lawmakers are expected to rally behind 2017 legislative proposals mirroring the Colorado measure, with Alabama, Kansas, Nebraska and Utah already announcing plans to push new laws.
And as a new patchwork of reporting rules unfurls, there are concerns that ambiguous requirements and multiple mandates will add to businesses’ administrative burdens — not to mention consumers.
Susan Haffield, a Minneapolis-based partner with Big Four firm PricewaterhouseCoopers LLP, said, “There is a lot of devil in the details, which, from my perspective, haven’t been ironed out with respect to these types of laws.”
More to follow leader
Even before the DMA denial, some states have recently jumped on the reporting regime bandwagon, including Oklahoma, which implemented its own consumer reporting measure that went into effect in November. Louisiana crafted a Colorado-style law, requiring both consumer notification and annual reporting to the revenue department, so long as the remote retailer generates more than $50,000 from annual in-state sales. The law goes into effect July 1.
H. 873 in part sets forth Vermont’s consumer notification requirements — but veered away from mandating disclosure to state tax authorities. However, while signed into law May 25, the notification mandate doesn’t take effect until the earlier of July 1, 2017, or the first day of the first quarter after Colorado implements its reporting regime.
“I don’t think it’s a big shock to anyone that most states are eager to slay this problem and when one state is successful, we all tend to copy that approach,” said Alabama Commissioner of Revenue Julie Magee. “I wouldn’t be surprised to see a version of a reporting bill in at least a half a dozen states or more in the coming months.”
During the MTC’s Executive Committee session, Magee announced Alabama's plans to push for a reporting regime like that of Colorado.
Meanwhile, many states continue to pursue different tax strategies for online retailers that may not incorporate reporting mandates. Virginia Gov. Terry McAuliffe announced plans to propose legislation imposing collection obligations on remote vendors with in-state warehouses or distribution centers. Other states are expected to advance regimes that set forth tax collection obligations based on a threshold of in-state sales, such as the economic nexus regimes that have triggered litigation in Alabama and South Dakota.
Has Colorado’s challenge concluded?
The path to the Supreme Court was paved by a commerce clause challenge to Colorado’s law. However, the dispute originated with several constitutional objections, including claims under the First Amendment and privacy rights.
Given that the U.S. Court of Appeals for the Tenth Circuit narrowly resolved only the Commerce Clause issues, the next steps for Colorado are unclear. An injunction enjoining enforcement of the reporting regime remains in effect, so the state could seek an order dissolving the injunction.
Robert Goulding, a communications specialist for the Colorado DOR, said, “We are aware of the decision and are evaluating our next steps for Colorado.”
The procedural uncertainty leaves many questioning when remote retailers must start complying with the notice and reporting requirements — not only in Colorado, but also in Vermont. Retailers might be obligated to abide by Vermont’s law before July 1 should Colorado move forward with its regime.
Complications with compliance
In the meantime, uncertainty remains over the specifics and scope of remote retailers’ obligations under these regimes.
For example, in addition to the annual reports, Colorado’s law requires remote retailers to provide customers with notifications of their potential use tax obligation at the time of each transaction. However, Haffield explained that there are questions regarding “what constitutes that notice and where should they put it.”
“Often, the communication with customers at the time of the transaction occurs only electronically,” she said. “Reprogramming that communication with the customer to provide that notice and how to do that, I think that’s going to be somewhat costly for remote sellers.”
Another consideration derives from gifts purchased in one state for delivery in another state, leaving open the question of whether remote sellers should report to the purchase state or the delivery state — or perhaps neither.
“More than anything, even if a state has rules, is being able to configure your reporting system to take into account when you’re supposed to report and when you’re not,” Haffield said.
Prepping for patchwork
As more reporting statutes and regulations surface in states, the absence of a uniform standard could complicate retailer compliance.
“There’s no template of what this law is,” said Matthew Walsh, vice president of tax for Sovos Compliance. Discrete provisions among state laws — defining the data required, reporting format and delivery mode — could require retailers to generate a separate report for every jurisdiction.
While third-party software can facilitate compliance, retailers will need to consider the state-specific requirements and whether their internal systems are equipped to collect and provide the requisite data.
Walsh said the ease of reporting will depend on several factors, including, “What’s the system currently doing for the seller? What kind of data do they have? What kind of data do they need to capture? If they need to bolster that, can they easily? And then, how easy will it be to extract that needed data back to the government?”
However, some retailers aren’t embracing reporting regimes without a fight. Critics of the Colorado law have expressed disappointment with the Supreme Court’s decision not to hear the so-called tattletale reporting case — and are calling on Congress to intervene.
“Remote sellers must make their voices heard,” said Hamilton Davison, president and executive director of the American Catalog Mailers Association, in a Dec. 12 statement after the DMA denial. “They should let policymakers at the federal and state level know that laws like these put an unfair burden on businesses and put personal privacy at risk while bringing government into the home and family.”
Consumer trust in catalog and e-commerce merchants is undermined “by requiring remote sellers to report to state tax collectors on the buying habits of their customers, including health care products, apparel or other sensitive items,” he added.
Losing digital dollars
On the other hand, a modern marketplace increasingly defined by e-commerce continues to take a toll on states’ sales tax bases.
Constraints on taxing authority over remote retailers derive from the Supreme Court’s 1992 decision, Quill Corp. v. North Dakota, 504 U.S. 298, which permits states to impose sales and use tax obligations on only those vendors with an in-state physical presence. However, many consider this an antiquated, pre-Amazon standard that didn’t contemplate digital commerce.
Efforts to capture online tax dollars have included affiliate and click-through regimes, and more recently, economic nexus thresholds. Notice and reporting mandates are just another arrow in cash-strapped states’ quivers.
Magee explained that research recently presented by Joe Garrett, Alabama’s deputy co-commissioner of revenue, spotlights a tax system unable to keep up with the modern economy, showing:
- Only one-third of the economy is taxed with sales tax, whereas it was once two-thirds of the economy.
- In the 1960s, Alabama collected $2 of sales tax for every $1 of income tax. The state now collects 66 cents for every $1 of income tax.
“Because of this, change is inevitable and unstoppable,” Magee said. “How else will we fund essential government services?”
As states and remote sellers start navigating the new laws, consumers likewise will be attempting to make heads or tails of their obligations.
Where out-of-state sellers have disseminated consumer notifications in select states, Haffield explained that some remote sellers released the notifications in staggered batches to manage the increased volume of customer calls. States, too, will see an uptick of calls from concerned citizens questioning whether they have to pay tax on transactions and how they should pay the tax.
Haffield noted that it is an open-ended question whether remote sellers must report transactions that aren’t taxable under state laws — so that consumers may find themselves in a position where they are determining whether the transactions are taxable.
Difficulties will increase “without a strong education program by each of the states to tell its citizens what to do when receiving these notices,” she said. “The educational efforts that I think will be needed may make it more difficult for the states and remote sellers than just collecting the tax itself.”
While the notice and reporting regimes are cast as non-tax laws, many suggest they encourage retailers to collect and remit instead.
“When you look at the cost benefit of the use tax reporting, for the states, I think if they enact the law, their hope will be that more retailers would rather collect the tax and they’ll pick up retail sales tax collection versus a lot of tax reporting,” Haffield said, noting that states likely don’t have sufficient resources to process all use tax information.
However, “there will be a lot of sellers who don’t do that,” she added. “And I think states are going to have to have some kind of a system in place to deal with the law if they do enact them.”
For remote retailers, software companies like Sovos Compliance offer a platform to navigate varying state tax bases and rates — and generally provide different technology catering to different types of businesses. For example, Amazon-size companies likely have needs distinct from smaller merchants. Or industries dealing in complex products, such as pharmaceuticals, may require a specific level of software sophistication.
“They should all do the same, they should all calculate the taxes and product taxability at the location where that product’s being sold,” Walsh said. “But there are some products that have been designed to support larger enterprises, so their software might have more complex functions than a smaller business would need.”
Small sellers’ disadvantage
However, expenses and personnel demands may deter smaller vendors from investing in a software platform for tax collection.
Everett E. Gallagher Jr., senior vice president and treasurer for Abercrombie & Fitch Co., said that the company collects tax on all online purchases in every state — and has done so for years.
The company uses the Vertex Indirect Tax O Series, which required an initial investment of money and time to configure the technology and set up the interface between Abercrombie & Fitch’s internal system and the Vertex system. And although sales tax compliance is predominantly software-supported, Gallagher explained that fiscal and IT resources are required to keep pace with software upgrades and sustain the systems’ interface.
“I feel bad for the small mom-and-pop shops,” Gallagher said. “Because if you’re doing limited sales, trying to put those systems in and incur the costs, that becomes an administrative burden.”