United States

Multistate: NCSL Releases Model Legislation for Expanding Sales and Use Tax Collection

Feb 08, 2016
From KPMG TaxWatch

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Recently, the National Conference of State Legislatures (NCSL) expressed frustration with continued inaction by Congress on legislation that would authorize states to require remote sellers to collect tax on sales into the state under certain conditions. NCSL sent model legislation to legislative leaders in each state, encouraging them to address remote sales tax collection in the upcoming legislative sessions. If enacted in toto by a state, the model would significantly expand the sales and use tax collection requirements for remote retailers and effectively establish a presumptive economic presence standard for sales and use tax purposes. In addition, the legislation contains provisions aimed to ensure that tax is collected on sales facilitated by certain electronic marketplaces, and includes information reporting requirements for those entities that refer customers to online retailers.

The model bill’s “doing business” statute includes provisions similar to the attributional, affiliate, and so-called click-through nexus statutes that have been enacted in several states in recent years. The click-through provisions of the model bill differ from those in most states by eliminating the requirement that the commission or other consideration paid to the in-state entity be related to completed sales to give rise to the presumption of nexus. The affiliate nexus provisions follow the pattern adopted in a number of states, but also provide that a person is presumed to be “doing business” in a state if an in-state related person shares management, business systems, business practices, or employees with the out-of-state retailer.  

Another novel suggestion in the model legislation is that a retailer is considered to be “doing business” in a state if it is engaged in “direct response marketing” targeted at consumers in the state. This includes soliciting via email, text and social media messages, as well as collecting, analyzing, and utilizing data on purchasers or potential purchasers in the state. It also includes using cached files or “cookies” stored on property in the state. Direct response marketing also includes “conducting any other actions that use persons, tangible property, intangible property, digital files or information, or software in this state” to improve the probability of making a sale to a customer in the state.

Under the model bill, a seller is also deemed to be “doing business” within a state if it offers its products for sale through one or more marketplaces operated by any “Marketplace Provider” that has substantial nexus with the state. It goes on to define a Marketplace Provider as any person who facilitates a sale by (1) listing or advertising taxable goods or service for sale in any forum, including an Internet website, or catalog, and, (2) either directly or indirectly through arrangements with third parties, collects receipts from the customer and transmits those amounts to the seller, regardless of whether the provider deducts any fees from the receipts transmitted to the seller. Under the model legislation, if a Marketplace Provider is considered to be “doing business” in a state, then it is required to collect and remit tax on any sales to in-state customers that it facilitates. A Marketplace Provider is relieved of this collection obligation if the actual seller provides the Marketplace with a copy of its sales tax registration certificate, or it appears on a list of registered entities published by the state tax agency.

Additionally, the model bill adopts information reporting requirements for entities it defines as "Referrers.” A “Referrer” receives a fee for listing products and the sales price of such products on its forum, but unlike a Marketplace Provider, a Referrer does not process the payment for the transaction. The model bill does not require a Referrer to collect and remit sales taxes on sales in which it is involved, but rather imposes permitting and reporting requirements. Specifically, a Referrer that received more than $10,000 in fees in the previous calendar year must apply for a permit and file with the state an annual report that identifies each retailer for whom it refers. A Referrer does not have to report information if the retailer either provides the Referrer with a copy of its sales tax registration, or the retailer appears on a list of registered entities published by the state tax department. Referrers that do not obtain a permit or report the required information will be liable for sales and use tax on completed sales that occur when a customer is referred to an in-state retailer.

Finally, the model legislation contains provisions stating that a seller is presumed to be doing business in a state if its sales to in-state customers exceed a threshold amount in the prior calendar year, with the precise amount to be set by the state legislature. An affected seller could overcome the presumption by proving “that it does not have nexus with this state under the Commerce Clause.” The model contains alternative language for states that are members of the Streamlined Sales and Use Tax Agreement that would establish a presumption of nexus with the state if the retailer has a certain amount of in-state sales, and the retailer has physical presence in, or is registered in, another state that is a member of the Agreement.

The model legislation includes a provision granting a direct appeal from a final determination to the state supreme court if the primary issue raised by the taxpayer is the constitutionality of a provision of the model legislation. According to the NCSL, this provision is designed to accelerate litigation over the model legislation and bringing a challenge to Quill to the Supreme Court.

Legislation based on the model bill has been introduced in Nebraska and Rhode Island so far. Please contact Harley Duncan at 202-533-3248 with questions on the NCSL model sales and use tax nexus expansion legislation.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.