Will your sales tax exposure shift from a physical presence to a volume base?


Wayfair case: oral arguments presented before U.S. Supreme Court
In a previous article we already discussed South Dakota v. Wayfair Inc., a case recently taken by the U.S. Supreme Court. At issue is whether the physical presence requirement for sales tax nexus can still be upheld, a principle that was affirmed in the Court’s 1992 precedent of Quill Corp v. North Dakota. This matter directly affects online retailers and small business owners, as state authorities can currently only hold retailers liable to collect and remit sales taxes if they have a physical presence in the state.
The U.S. Supreme Court heard oral arguments on April 17, 2018 and a decision is expected by the end of June 2018.

U.S. Supreme Court may leave it up to Congress to enact sales tax collection legislation

 Although it is still unclear what the outcome will be, it appears that the Court is aware what the potential impact of overturning Quill could be and that the consequences are not limited to this case only. Different concerns were raised, particularly the risk that the cost and burden on small business owners may be too high for compliance with new sales tax regulations if there is no longer a physical presence requirement. Establishing a minimum standard may be a potential solution. Another concern was that states may want to pursue uncollected sales and use taxes retroactively as it is currently unclear how the states would collect the tax.

To resolve these issues, it was suggested that Congress might be better placed to deal with this subject and enact sales tax collection legislation. Although various legislative initiatives have been proposed over the previous years, no federal legislation has been enacted so far. The possibility exists that the Supreme Court would not overturn Quill and leave it to Congress, which could draft legislation wherein the interests of both taxpayers and states are balanced.

New use tax reporting requirements: increased compliance burden for non-collecting retailers, even if no sales tax nexus exists

Regardless of whether the physical presence requirement will be overruled by the U.S. Supreme Court, taxpayers operating in different states will probably experience an increase in the sales and use tax compliance burden in the near future. One way of generating more sales tax revenue may be that states redefine sales tax nexus standards and broaden the scope of taxpayers required to collect sales tax. Another way is imposing use tax reporting requirements on out-of-state retailers not having sales tax nexus and therefore not collecting any sales tax in the state.

When sales tax has not been collected on taxable goods or services, the buyer is generally required to self-remit use tax on the in-state storage, use or consumption of these items. States often experience difficulties in enforcing use tax from taxpayers, which led to the creation of new use tax reporting requirements in certain states. In most states these reporting requirements only apply when a certain threshold of in-state sales is met. Use tax reporting requirements are amongst other states applicable in Alabama, Colorado, Kentucky, Louisiana, Oklahoma, Pennsylvania, South Dakota (pending the Wayfair case), Tennessee, Vermont and Washington.

Such reporting requirements can take different forms: the out-of-state retailer may be required to notify purchasers in that state that use tax is due on certain purchases, provide an annual statement to the Department of Revenue, include a notice on the company’s website … . Failure to comply with use tax reporting requirements can result in substantial penalties.

Remote sellers with $10,000 or more in retail sales to Washington purchasers should collect sales tax or comply with use tax reporting requirements

As an example, below is an overview of the use tax notice and reporting requirements applicable in Washington for remote sellers.

Starting January 1, 2018, certain marketplace facilitators, remote sellers and referrers are either required to collect and remit sales tax on in-state sales or comply with use tax reporting requirements. As regards remote sellers, the threshold for being subject to these requirements is $10,000 or more in retail sales to Washington purchasers.

Sellers that decide not to collect Washington sales tax on in-state sales should provide the following:

  1. Platform notice: sellers should post a conspicuous notice on the marketplace (this can be a platform, website or any other similar medium) to inform Washington purchasers that sales or use tax is due on certain purchases and purchasers are required to file use tax returns.
  2. Invoice/receipt notice: at the time of the sale, seller should include a notice on the invoice/order and on the receipt. The notice should state that no sales tax is collected on the sale and purchasers may be required to self-remit use tax.
  3. Annual report to purchasers: sellers should provide an annual report to each Washington purchaser by February 28 of the following year including a similar message than on the invoice/receipt notice. In addition, a transaction report should be provided for the items purchased during the year.
  4. Annual report to Department of Revenue: the seller should also file an annual report with the Washington Department of Revenue by February 28 of the following year. The purchaser’s name, billing and shipping address and total amount of all purchases by each purchaser should be provided to the Department of Revenue.

Sample notices and reports can be found on the website of the Washington Department of Revenue. In case of non-compliance, different penalties may be imposed but the amounts can be substantial. Failing to post the platform notice on the website or on the invoice/receipt can for example lead to a penalty of $20,000.

The above illustrates that the sales tax landscape becomes more and more complex and the compliance burden on taxpayers keeps increasing. 


This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.