Redpath Insights

States Look for Solutions to Capture Lost Sales Tax Revenue

by Teri Grahn, CMI

August 1, 2017 — E-Commerce has transformed the tax landscape when it comes to withholding and remitting sales tax on products. For 25 years, a company’s requirement to collect and remit a state’s sales tax has been determined by Quill Corp v. North Dakota, a U.S. Supreme Court case. The Supreme Court ruled that a company would be required to collect and remit sales tax to the state if the company had substantial physical presence in that state, also known as “nexus.”

However, as e-commerce has grown in popularity, there’s been debate over what “substantial physical presence” means and when exactly a company should be required to collect and remit sales tax to a state. Many states believe they are losing out on significant sales and use tax revenue. Since there has not been a decision on a national solution, states are creating their own solutions and looking for litigation that could rise up to the U.S. Supreme Court and force a judicial ruling on the matter.

States have created a variety of solutions to the sales and use tax problem. Two of the popular solutions that states are imposing are economic nexus and reporting requirements.

  • Economic nexus says that if a company’s level of sales or gross receipts activity within the state rise above a set level, the company is responsible for collecting and remitting sales tax to the state.
  • Reporting requirements mandate that retailers do three things:
    • The company must notify buyers they are responsible for paying and reporting state use tax on a purchase.
    • The company may be required to send buyers an annual statement of all of their purchases from the retailer.
    • The company may be required to file an annual report with the state’s Department of Revenue that identifies the total amount paid by purchasers within the state where sales tax was not collected.

On July 1st, 2017, Colorado enacted a reporting requirement. The U.S. Supreme Court declined to hear an appeal on a case challenging Colorado’s reporting requirement, which has opened the door for states to develop and enact their own requirements inspired by Colorado’s framework.

South Dakota enacted economic nexus legislation in March 2016. The legislation says that if a seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000 or the seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions. In March 2017, the South Dakota Sixth Judicial Court ruled that the economic nexus legislation is unconstitutional. The case is headed towards an appeal to the U.S. Supreme Court.

Without clear authority from Washington D.C. on how remote and online sales should be taxed from a sales and use tax perspective, states will continue to create their own tax regimes to capture lost revenue. With states aggressively designing and implementing sales and use tax regimes, retailers should prepare for the impact it could have on their business.

Now is the time to review your state sales tax filing requirements and determine your nexus footprint. A review of your state activities should be looked at to identify and quantify any tax exposure or liabilities. Once the analysis is competed, a determination can be made if additional state returns need to be filed and/or if any state voluntary disclosure agreements should be done.

Teri Grahn, CMI

Teri Grahn, CMI

Teri Grahn, senior manager is the sales and use tax service area leader and is a certified member of the Institute for Professionals in Taxation. She educates and assists commercial entities with multi-state sales and use tax procedures and compliance, and works with clients to review internal records and practices and educates their staff on processes. She also helps clients navigate the unknowns of entering new states and jurisdictions by researching specific products and services, system and invoice set up to remain compliant with future transactions. Teri also supports clients through sales and use tax audits by investigating assessments and answering questions throughout the process. Teri works with clients in various industries including manufacturing and distribution, construction and real estate, and technology. Prior to joining Redpath and Company in 2003, Teri performed sales and use tax audits for the Minnesota Department of Revenue for 9 years.