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Massachusetts DOR Sending Letters to Sellers Regarding July 1 Effective Date of Economic Nexus Directive

Recently, the Massachusetts Department of Revenue (Department) sent letters to several companies regarding Directive 17-1. The Directive announces a “rule” requiring remote internet sellers to register for and begin collecting Massachusetts sales and use tax (sales tax) by July 1, 2017, if they had more than $500,000 in Massachusetts sales during the preceding year. The legal premise behind the rule is that the Department believes sellers with more than $500,000 in annual Massachusetts sales must have more than a de minimis physical presence so that requiring sales tax collection would not be prohibited by Quill Corp v. North Dakota, 504 US 298 (1992). The Directive’s examples of such physical presence include the presence of cookies on purchasers’ computers, use of third-party carriers to make white-glove deliveries and the use of online marketplaces to sell products. The Directive also states that sellers who fail to collect tax beginning July 1, 2017 will be subject to interest and penalties (plus, of course, any uncollected taxes).

We think the Directive is contrary to law on three main grounds. First, we believe that the items that the Department asserts create physical presence are insufficient to establish more than a de minimis physical presence. For example, the presence of cookies on computers in a state appears to be less of a physical presence than the floppy disks the seller in Quill sent into North Dakota (which were used by its customers to place orders) that the United States Supreme Court viewed as de minimis. Second, the Directive violates the state administrative procedures act because it constitutes an administrative rule that was not validly adopted. Third, the Directive’s rule violates the Internet Tax Freedom Act, a federal statute, because the rule discriminates against internet sellers.

By its own terms, the Directive applies only prospectively. The Directive does not assert a blanket rule that internet sellers are liable for sales tax for periods prior to July 1, 2017, if they met a certain sales threshold. The risks from non-collection for such periods are dependent on a company’s specific facts. The letters advise sellers that they may be eligible for voluntary disclosure for such prior periods.

Companies have two general options: (1) register and begin collecting or (2) not register or collect. Litigation has been brought on behalf of a number of sellers to challenge the Directive on the grounds identified above. One important aspect of that litigation is the request for an injunction barring the enforcement of the Directive pending a court decision; an injunction would likely prompt many sellers to take a “wait and see” approach. Ultimately, sellers must make a business decision based on their own facts and business circumstances.




New York State FY 2018 Budget Bill: Sales Tax Highlights

On January 16, Governor Cuomo introduced the 2018 New York State Executive Budget Legislation. The bill proposes a number of changes to the New York State sales tax law. Below is a summary of the highlights.

Sales and Use Tax

  • “Marketplace Providers”

The governor’s bill proposes to impose sales tax registration and collection requirements, traditionally imposed on vendors, on “marketplace providers.” This provision is essentially an effort to obtain sales tax on sales to New York customers that make purchases over the internet from companies that have no physical presence in New York and do not collect sales tax in New York when those companies make sales through online marketplaces. In the governor’s Memorandum of Support of this bill, he affirmatively states that “the bill does not expand the rules concerning sales tax nexus”. Although, as noted below, this claim may not be true.

The bill effectively shifts the sales tax collection burden from the traditional vendor to the marketplace provider. The bill defines marketplace provider as “a person who, pursuant to an agreement with a marketplace seller, facilitates sales of tangible personal property by such marketplace seller or sellers.”

A person “facilitates a sale of tangible personal property” if the person meets both of the following conditions:

(i) such person  provides the  forum  by which the sale takes place, including a shop, store, or booth, an  internet  website,  a catalog,  or  a similar  forum;  and

(ii) such person or an affiliate of such person collects the receipts paid by a customer  to  a marketplace  seller  for  a  sale  of  tangible  personal  property.

The bill caveats that “a person who facilitates sales exclusively by means of the internet is not a marketplace provider for a sales tax quarter when such person can show that it has facilitated less than one hundred million dollars of sales annually for every calendar year after [2015].”

Unlike the definition of the term “vendor” in the current Tax Law, the definition of “marketplace provider” does not contain a doing business or physical presence component. Accordingly, despite the governor’s assertion that the bill does not expand the rules concerning sales tax nexus, this provision may expand the sales tax nexus rules by potentially imposing a sales tax collection obligation on marketplace providers that do not have a physical presence in New York.

In an effort to minimize the number of entities with a collection requirement, the bill provides that if a marketplace seller obtains a certificate of collection from the marketplace provider, it is not required to collect sales tax as a vendor.  The bill caveats that if the marketplace provider and the marketplace seller are affiliated parties, and the marketplace provider fails to collect the tax, the marketplace seller will remain liable for the sales tax.  For such purposes, parties are affiliated if they have as little as five percent of common ownership.

The proposed legislation would not permit marketplace sellers that sell to customers in New York through a [...]

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