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State Sales Tax Compliance for Remote Sellers is for Recyclers Too

In the January/February edition of SPAN, we wrote about the current state of play for sales and use tax compliance legislation in the states (frequently referred to as “nexus” legislation) and how it might relate to, and impact, the scrap recycling industry.

We focused on the manufacturing sales tax exemption because we are hearing more reports of ISRI members being audited and assessed thousands, and sometimes even millions of dollars in unpaid sales taxes for manufacturing equipment. While this remains a concern for ISRI members, however, the remote sales and use tax issue is a much broader tax matter that warrants similar vigilance.

The collection of sales and use taxes by remote sellers from one state into another state is one of the most prominent tax issues in the state legislatures this year. More than 35 bills have been introduced in 17 states to promote broader collection of sales taxes which are already legally due and payable. The purpose of all of these bills is the same: to promote collection of sales taxes by as many sellers as possible (including remote sellers). State legislators are beginning to pursue a variety of strategies to enhance compliance which could have unanticipated consequences.

Recyclers who sell and/or broker sales in multiple states need to pay attention. While much of the media focus has been on remote online sales, the proposals being considered apply to ANY sales into another state. In the past, if the seller did not have a physical operation and location in the state in which goods were sold, they likely did not have to pay that state’s sales taxes. This is all quickly changing now that the U.S. Supreme Court has essentially given states its blessing to pursue alternative approaches when it denied a petition last December to rule directly on the issue.

Given that this is one of the most prevalent tax issues addressed by state legislatures this year, we thought it would be useful to partner with the state tax experts at MultiState Associates (the ISRI consultant providing state legislative and regulatory tracking services direct to the chapters and ISRI membership) to provide a survey of current state law of sales tax compliance directed at remote/internet to provide context for these bills. In other words, under what circumstances does a state by law or regulation currently require sales tax collection and remittance?

We've placed the states based in three broad buckets:

(1) Economic Nexus Bills. These bills set “physical presence” as the standard for state authority to require sellers to collect sales taxes. Instead of focusing on physical presence, these bills set a bright line sales threshold (in dollars or number of transactions or both), with sellers exceeding these thresholds required to collect legally due and payable sales taxes. These measures were inspired initially by U.S. Supreme Court Justice Anthony Kennedy, who, in his concurring opinion in DMA v. Brohl, invited the legal system to present the Court with a case that would allow it to revisit its holding in the precedent-setting case Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in which the Court held states could not collect sales taxes from out-of-state sellers who do not have a physical presence in the state.

More and more state policymakers are of the opinion that a physical presence isn’t the correct standard and are now pushing the limits and creating unique and creative means in which to get their hands on sales taxes. In the state of Colorado, for instance, a new compliance burden on Colorado businesses includes a requirement of notifying out-of-state customers of their duty to remit use tax, as well as providing the state revenue department all of its customer information. The State of Vermont has a comparable law in place that will go into effect on July 1, 2017, and as with the Colorado law, noncompliance comes with a steep financial penalty that could add up quickly. Louisiana and Oklahoma have similar reporting laws but without the monetary fines.

(2) Expanded Nexus Bills. These bills aim to extend the physical presence standard to the existing constitutional limit. Many non-practitioners mistakenly believe that “physical presence” means that a company must have a store or a distribution center or own some other real estate in a state to be subject to sales tax collection. However, “physical presence” isn’t clear; yes, it includes ownership of real estate, but it also has been interpreted to extend to activities of affiliates, agents, and others who are acting on behalf of, or in conjunction with, the remote/internet seller. This could clearly include the brokers that many recyclers utilize for scrap transactions. Examples of these “expanded nexus” bills include affiliate nexus, click-through nexus, and drop-ship nexus. This category also includes extending the imposition of a sales tax collection obligation to new economic actors, such as online marketplaces (assuming they have physical presence in the state; if they do not, then the bill falls under economic nexus).

(3) Non-Nexus Collection Bills. Other sales tax compliance bills that don’t address the nexus question often require out of state sellers to inform their buyers about the responsibility to pay sales tax on their purchases, typically with an annual mailer.

The three maps below show whether or not a state falls in each of these three categories. Note that some states fall in more than one bucket.

Economic Nexus
Six states have economic nexus laws or rules for sales tax (Alabama, Minnesota, Oklahoma, South Dakota, Tennessee, and Vermont), but two are not enforced (Minnesota and Oklahoma). Vermont's law is not effective until the latter of July 1, 2017.


SPAN_CurrentLawsEconomic

Expanded Nexus
By far, some form of “expanded nexus” is the most prevalent nexus standard for sales tax, with all but five states having affiliate or click-through nexus laws on the books. Even among these five, however, the Department of Revenue (or equivalent agency) in a few of them has taken the position that click-through relationships create nexus or that underlying law provides authority to require collection based on an affiliate relationship (Arizona and Hawaii).


SPAN_CurrentLawsExpandedNexus

Non-Nexus Collection Bills (Reporting and Notification Requirements)
Eight states currently have use tax notice and reporting requirements (Colorado, Kentucky, Louisiana, Oklahoma, South Carolina, South Dakota, Texas, and Utah), although Texas' requirement is not enforced. Tennessee formerly had this requirement, but it was repealed (effective 2014).

SPAN_CurrentLawsNotices


To be certain, the matter of sales taxes will continue to be on the forefront of states’ agendas so long as budget shortfalls remain a problem. ISRI members should be vigilant and consult frequently with their tax counsel to ensure compliance with the ever-changing laws. For more information on the progress of tax legislation on various matters in the states, our friends at MultiState Associates have written a short analysis, which ISRI members may access online through the State Policy webpage at ISRI.org/state.

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