With the two-year anniversary of the U.S. Supreme Court’s landmark Wayfair ruling just two weeks away, the enforcement “grace period” may be over.
Corporate tax departments have wondered for months whether states would initiate enforcement strategies under new statutes imposing tax collection duties on remote sellers and marketplace providers. To date, taxpayers have seen very few audits or industry-wide compliance initiatives.
The Covid-19 pandemic has slowed the process, forcing state revenue departments to ease up on enforcement efforts as auditors and taxpayers work remotely.
But this “unspoken grace period” may be coming to an end shortly, as state tax officials begin to reopen their doors and to address the fiscal chaos wrought by the pandemic, said Liz Armbruester, senior vice president of global compliance for tax compliance and software company Avalara.
“It’s likely you’re going to see an acceleration of audits and agencies implementing more opportunities to get businesses to be compliant around these rules,” Armbruester told Bloomberg Tax. “Whatever that enforcement might look like on a state-by-state basis, there is an expectation the activity will increase and accelerate due to this pandemic.”
Based on her informal conversations with revenue officials, Armbruester said the departments wanted to give sellers ample opportunity to understand the emerging pattern of state laws. They have issued regulations and guidance to assist taxpayers with their compliance responsibilities. This period of forbearance, however, is quickly coming to an end, in part because states face significant fiscal stress.
“They are now trending toward a period that says, ‘we’ve given everybody grace, and it’s time for us to have an opportunity to collect all the dollars due to us,’ ” she said.
The June 21, 2018 South Dakota v. Wayfair ruling tossed out the physical presence standard the high court had affirmed in 1992 and opened the way for states to impose sales tax requirements based on remote vendors’ economic activity. It also ushered in new state sales tax collection-and-remittance requirements on marketplace facilitators such as Amazon.com Inc., Etsy Inc., and eBay Inc. that provide a platform for third-party, typically smaller, merchants to sell their goods.
The marketplace facilitator bill (S.B. 138) approved last week by the Louisiana Legislature would be the first such law to include an “opt-out” provision limited to a specific industry.
The bill, if signed by Gov. John Bel Edwards (D), would allow marketplace facilitators and third-party sellers to enter into agreements letting the seller collect and remit, in lieu of the facilitator.
But that would apply only if the seller has U.S. sales in excess of $1 billion, and the seller would have to fall within specific statutory provisions for certain telecommunications service providers that collect the state’s 911 fees. If the bill becomes law, Louisiana will be the only state with that kind of industry carve-out, for telecommunications companies, according to Eversheds Sutherland.
To make use of the opt-out, the seller would also have to provide evidence to the marketplace facilitator that it’s registered as a dealer with the state and localities to collect sales and use tax. And it would have to notify the Louisiana Sales and Use Tax Commission for Remote Sellers it will collect and remit all applicable taxes and fees on its sales through the marketplace.
By having the opt-out provision, Louisiana would join several states that permit certain marketplace sellers to agree with marketplace facilitators that the marketplace seller will remain liable for sales and use tax collection and remittance, subject to various conditions.
The language lines up with that in a model statute adopted in January by the National Conference of State Legislatures. Louisiana’s bill hews very closely to that model, Scott Peterson, vice president of government relations for Avalara, said June 4.
If signed, Louisiana’s remote seller law and the new marketplace facilitator law would take effect July 1. That means marketplace facilitators won’t get the same 30-day notice of enforcement that remote sellers have gotten, since the governor hasn’t yet signed the bill, Peterson said.
Also, Louisiana will have a new return for remote sellers and marketplaces people to learn. “They have a direct marketers return which allows for one rate that will no longer be available for remote sellers and marketplaces that exceed the state’s economic nexus threshold,” he said.
Washington Emergency Regulations
The Washington Department of Revenue has spotted some gaps in its Wayfair-inspired tax regime and quietly issued emergency regulations affirming its law imposing tax duties on remote sellers with an economic presence in the state.
Washington isn’t a newcomer to “economic nexus.” The state previously established tax-collection thresholds of $100,000 in annual sales and 200 annual transactions, effective Oct. 1, 2018. The nexus threshold initially arrived as a regulation and was later codified by statute.
But the department found some inconsistencies in the administrative code that might confuse taxpayers, and issued an emergency regulation May 22. The agency specifically warned taxpayers, particularly marketplace sellers, not to rely on those code provisions until new rules are adopted through the standard rulemaking process. The department expects the state to adopt final rules during the fourth quarter of 2020.
“Until the final rules reflecting these changes are adopted through the standard rulemaking process, the Department wants the public to be aware that the current Rules 193 and 221 may contain outdated or incomplete information regarding who is required to collect sales or use tax on taxable retail sales into Washington,” the department said in its emergency rule.
—With assistance from Michael J. Bologna in Chicago.