More States Expected to Enact Use Tax Disclosure Rules in 2017

In light of Colorado’s victory, many more states look set to implement rules requiring vendors to notify purchasers of their potential use tax obligations.

By Jeff Glickman, SALT partner

For decades, one of the states’ most difficult enforcement issues has been collecting use tax. Since the U.S. Supreme Court first held that physical presence was required in Bellas Hess in 1967, and then held to that rule in its Quill decision in 1992, states have been searching for ways to help them more easily enforce use tax. For example, many states have expanded their rules regarding what constitutes a physical presence to include affiliate nexus and “click-through” nexus. The more out-of-state vendors that a state could require to collect use tax, the less the state had to rely on its residents to self-remit. It is often not cost-effective for a state to audit each individual resident and review all of his/her purchases to identify those where use tax was not collected. Even if some use tax liability is discovered, the amount is typically not worth the audit efforts/costs.

Then in 2010, Colorado enacted a new law, not aimed at requiring out-of-state vendors to collect Colorado use tax, but rather aimed at requiring out-of-state vendors to report certain information to Colorado purchasers and the state to make the collection of use tax from Colorado residents easier and more cost-effective. [1] That law required an out-of-state seller that did not have an obligation to collect and remit Colorado use tax (i.e., those sellers that did not have physical presence) and that had at least $100,000 in annual gross sales to Colorado purchasers to (i) send a notice to Colorado purchasers informing them that they may have a Colorado use tax obligation, (ii) send to Colorado purchasers who spent more than $500 with the seller an annual report by Jan. 31 summarizing their purchases (with dates and amounts) from the prior calendar year, including a reminder of their obligation to pay Colorado use tax, and (iii) send to the Colorado Department of Revenue an annual report by March 1 listing the customers’ names, addresses and total amount spent for the prior calendar year. The penalties are as follows: (a) failure to comply with (i) is $5 for each occurrence, (b) failure to comply with (ii) is $10 for each occurrence, and (c) failure to comply with (iii) is $10 for each purchaser that should have been included in the report.

As reported in our November/December 2016 SALT Newsletter, the party challenging the constitutionality of this law finally lost when the U.S. Supreme Court declined to hear the appeal. Therefore, Colorado is free to enforce this law, which should help the state identify the Colorado residents who have use tax liability, and more importantly, how much that liability is.

As expected, some states anticipating Colorado’s victory enacted similar laws during 2016. For example, Louisiana has a substantially similar law that is effective July 1, 2017. [2] Two notable differences with the Louisiana law are that it applies to out-of-state vendors with $50,000 of annual sales to Louisiana (versus $100,000 in the Colorado law) and it does not impose monetary penalties (but it does give the state the ability to enforce the law through other means, like issuing subpoenas).

Oklahoma also enacted a use tax disclosure law in 2016 that became effective on Nov. 1, 2016. [3] Unlike Colorado and Louisiana, the law does not set a minimum sales threshold and requires only that any out-of-state seller not required to collect use tax provide a statement to each Oklahoma purchaser by Feb. 1 indicating the total sales made to such customer in the prior calendar year. It also requires the following statement (or something substantially similar): “YOU MAY OWE OKLAHOMA USE TAX ON PURCHASES YOU MADE FROM US DURING THE PREVIOUS TAX YEAR. THE AMOUNT OF TAX YOU MAY OWE IS BASED ON THE TOTAL SALES PRICE OF [INSERT TOTAL SALES PRICE] THAT MUST BE REPORTED AND PAID WHEN YOU FILE YOUR OKLAHOMA INCOME TAX RETURN UNLESS YOU HAVE ALREADY PAID THE TAX.” The bill does not require any disclosure to the Oklahoma Department of Revenue.

Finally, Vermont enacted use tax reporting requirements in 2016. [4] The law is similar to the Colorado version except that there is no minimum sales requirement to be subject to the reporting obligations and there is no reporting obligation to the state, just to purchasers. The law takes effect on the earlier of July 1, 2017 or the first day of the quarter following the quarter in which Colorado implements its reporting requirements (which at that time were subject to the legal challenge).

It is anticipated now that in light of Colorado’s victory, more states will look to enact these types of laws during the 2017 state legislative sessions. In fact, on Jan. 12, 2017, legislation was introduced in Georgia that would provide for these notice requirements. [5] The Georgia bill sets a threshold of $250,000 sales delivered to the state or at least 200 retail sales delivered to the state, and requires those that meet these requirements to either collect and remit the state’s sales/use tax or comply with the reporting requirements (similar to those in Colorado).

This is shaping up to be a very busy year for sales tax nexus issues, not only with the reporting rules but also with the ongoing constitutional challenges related to economic nexus rules for sales/use tax that were adopted in Alabama and South Dakota. [6] The sales tax nexus landscape is changing, and Aprio’s SALT team is ready to advise you on these issues so that you remain in compliance with your sales/use tax obligations. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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

This article was featured in the January 2017 SALT Newsletter. To view the entire newsletter, click here.

[1] Col. Rev. Stat. § 39-21-112(3.5).

[2] La. Rev. Stat. § 47:309.1 (Act. 569, H.B. 1121 (2016)).

[3] Ok. Stat. tit. § 68 1406.2 (H.B. 2531 (2016)).

[4] 32 V.S.A. § 9712 (H. 873 (2016)).

[5] Georgia H.B. 61 (2017).

[6] These rules were addressed in our March 2016 SALT Newsletter.

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.