A Review of 2017 State Tax Developments and a Look Ahead to 2018

As you begin preparing to file 2017 taxes and plan for 2018, check out this quick overview of state tax developments that may impact your business moving forward.

By Jess Johannesen, SALT manager

2017 was a very busy year for state tax developments. As businesses begin preparing for the 2017 filing season and planning for 2018, we have provided a brief summary of certain developments that are effective for either 2017 or 2018. These developments are grouped into three categories: (1) income tax apportionment, (2) remote seller sales tax economic nexus and use tax reporting, and (3) miscellaneous. [1]

Income Tax Apportionment

• Delaware’s three-factor apportionment formula will no longer be equally weighted, as the 2017 apportionment formula will now include a double-weighted sales factor. This is part of the state’s four-year phase-in of a single sales factor apportionment formula in 2020.
• North Carolina’s three-factor apportionment formula will no longer have a triple-weighted sales factor, as the 2017 apportionment formula will now include a quadruple-weighted sales factor. This is part of the state’s phase-in of a single sales factor apportionment formula in 2019.
• Tennessee’s three-factor apportionment formula will no longer have a double-weighted sales factor, as the 2017 apportionment formula will now include a triple-weighted sales factor. Also, for 2017, qualifying manufacturers may make an election to use a single sales factor apportionment formula. Finally, keep in mind that the state changed to a market-based approach for sourcing service revenue for tax years beginning on or after July 1, 2016; for calendar year taxpayers, 2017 will be the first year under the new methodology.
• Effective Jan. 1, 2018, Montana adopted the market-based sourcing approach for sourcing service revenue.
• Effective Jan. 1, 2018, Oregon adopted the market-based sourcing approach for sourcing service revenue.

Remote Seller Sales Tax Economic Nexus and Use Tax Reporting

This section is divided into three buckets: (1) states that have enacted sales tax economic nexus, (2) states that have enacted remote seller use tax reporting requirements and (3) states that have enacted provisions that allow taxpayers to elect to be subject to either (1) or (2).

Please note that sales tax economic nexus rules are currently in violation of existing United States Supreme Court guidance that requires that a taxpayer have a physical presence in the state in order to be subject to sales/use tax collection requirements. [2] Many of these sales tax economic nexus provisions are currently being challenged by taxpayers. We anticipate that at some point the United States Supreme Court will hear the issue and will ultimately decide whether to keep the physical presence requirement or reverse its prior ruling. [3] Until then, you should speak with your tax advisor as to your specific situation.

Remote Seller Sales Tax Economic Nexus

• Effective Oct. 1, 2017, Maine requires remote sellers to collect and remit sales tax if the remote seller, during the prior or current calendar year, has over $100,000 of sales into Maine or at least 200 separate transactions for delivery into Maine.
• Effective Oct. 1, 2017, Massachusetts requires Internet vendors to collect and remit sales tax if the remote seller, during the period from Oct. 1, 2016 through Sept. 30, 2017, has over $500,000 of sales into Massachusetts and at least 100 separate transactions for delivery into Massachusetts. Effective beginning Jan. 1, 2018, the measurement period is the prior calendar year. In addition, the rule requires that the Internet vendor have some connection with the state, which could be satisfied by having a Massachusetts customer download an application onto his or her mobile phone or store “cookies” on the device.
• Effective Dec. 1, 2017, Mississippi requires remote sellers to collect and remit sales tax if the remote seller has, during the prior 12 months, over $250,000 of sales into Mississippi.
• Effective Jan. 1, 2018, Ohio will require remote sellers to collect and remit sales tax if the remote seller, during the prior or current calendar year, has at least $500,000 of sales into Ohio.
• Effective July 1, 2017, Indiana requires remote sellers to collect and remit sales tax if the remote seller, during the current or prior calendar year, has over $100,000 of sales into Indiana or at least 200 separate transactions for delivery in Indiana.
• Vermont and North Dakota have enacted economic sales tax nexus provisions, but their effective dates are dependent upon a reversal of the physical presence requirement, either by the U.S. Supreme Court overturning Quill or Congress enacting federal legislation.

Remote Seller Use Tax Reporting Requirements

• Effective July 1, 2017, Colorado requires non-collecting remote sellers with over $100,000 of annual sales to Colorado customers, in the prior or current calendar year, to comply with several reporting requirements to both Colorado purchasers and the Colorado Department of Revenue. This legislation was actually enacted in 2010 but has recently become effective following Colorado’s court victory after about a six-year litigation battle.
• Effective July 1, 2017, Louisiana requires non-collecting remote sellers with over $50,000 in annual sales to Louisiana customers, in the current calendar year, to comply with several reporting requirements to both Louisiana purchasers and the Louisiana Department of Revenue.
• Effective July 1, 2017, Vermont requires non-collecting remote sellers to make certain use tax notifications to Vermont customers and, if the remote seller has at least $100,000 of sales to Vermont customers in the prior calendar year, to make certain use tax notifications to the Vermont Department of Taxes.

Remote Seller Elections

• By March 1, 2018, Pennsylvania requires remote sellers with at least $10,000 of sales to Pennsylvania customers, in the prior 12-month period, to either collect and remit sales tax or comply with use tax notification requirements.
• Effective Aug. 17, 2017, Rhode Island requires certain non-collecting retailers with at least $100,000 of sales to Rhode Island customers or at least 200 or more separate transaction for delivery into Rhode Island, during the prior calendar year, to either collect and remit sales tax or comply with use tax notification requirements.
• Effective Jan. 1, 2018, Washington requires remote sellers with at least $10,000 of sales to Washington customers, during the current or prior calendar year, to either collect and remit sales tax or comply with use tax notification requirements.

Miscellaneous State Tax Developments

• Effective Jan. 1, 2018, Arkansas will no longer require a separate state subchapter S election. Any S-corporation for federal income tax purposes will be considered an S-corporation for Arkansas income tax purposes (and cannot elect to be a C-corporation for state purposes).
• Effective Jan. 1, 2018, Georgia’s Net Worth Tax (reported on the 2017 income tax return) will no longer have a $10 minimum as the first $100,000 of Georgia net worth will be exempt.
• Effective Jan. 1, 2018, Illinois will have a 6.25 percent rental sales tax and rental use tax. Under Illinois’ current Retailers Occupation Tax (i.e., sales tax), leases/rentals (other than automobile rentals) are not subject to tax since the lessor is viewed as the end consumer. Accordingly, lessors must pay the tax when they purchase the item and cannot provide a resale exemption certificate. The new rental sales/use tax will be imposed on the renting of merchandise under a “rental purchase agreement” that meets certain criteria. Accordingly, not all rentals or leases will be subject to this new 6.25 percent sales tax.
• Effective July 1, 2017, Washington’s economic nexus for Business and Occupation (B&O) Tax purposes extends to taxpayers that qualify under the retail classification. Therefore, if a retailer, during the prior or current calendar year, has over $267,000 of Washington sales or if the retailer’s Washington sales are at least 25 percent of its total sales, the retailer is subject to the B&O tax. Retailers now join those taxpayers in the services and wholesaling tax classifications, who are already subject to those nexus standards.

Contact Jess Johannesen at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the November/December 2017 SALT Newsletter.

[1] Please note that this is a very high-level summary and not an exhaustive list of state legislative departments. You should check with your advisor regarding the details of these bills, as well as others that may impact your business.

[2] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[3] On Oct. 3, 2017, South Dakota petitioned the United States Supreme Court to hear the issue.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.