Use Tax - To Report or To Collect and Remit: That is the Question

Retail|State and Local Tax|Tax

By Jack Stewart

If the United States Supreme Court upholds the physical presence standard in its South Dakota v. Wayfair opinion, many remote sellers lacking the physical presence nexus in various states might still find themselves deciding to collect and remit the state’s use tax. 

The United States Supreme Court let stand a U. S. Circuit Court’s opinion in DMA v. Brohl II, confirming the constitutionality of use tax reporting laws.  Since then states have been passing laws requiring remote sellers who lack the physical presence nexus, but meet certain economic thresholds in the state during a year (usually $100,000 in sales or 200 transactions; these amounts can vary by state), to comply with various use tax reporting requirements or to register and collect the tax from their customers.  In some instances, complying with the use tax reporting requirements might be more difficult than collecting and remitting the tax.     

While use tax reporting requirements do not require the collection of the state’s use tax, they generally require remote sellers to do one, some or all of the following:

  • Post of notice on the website or sale forum indicating that the state’s sales or use tax might be due on a purchase.  Inform buyers that they might be required to file a use tax return with that state’s Department of Revenue or Taxation in connection with the purchase and delivery of the item they are obtaining.
  • Printing a notice on all sales documents (i.e., invoices, receipts etc.,) stating that the state’s sales or use tax was not collected on the sale and that the buyer might have to directly remit the tax to the state.
  • Provide an annual report to the customer, by a certain date (usually by January 31st of the following year) with a listing of that customer’s purchases stating that sales or use tax was not collected on purchases and that the customer might have to file a use tax return with the state.
  • Provide an annual report to the Department of Revenue or Taxation, by a specific date (usually by January 31st or some other date proscribed by the state in the following year).  The report should contain: the customer’s name, billing address, delivery address, and a notation of whether the delivery address is different than the purchaser’s last known mailing address, and total dollar amount of purchases.

Failure to comply with each of the requirements usually carry some type on monetary penalty for each offense, which can add up very quickly.  The requirements vary by state.  States such as Oklahoma have limited requirements, whereas states like Colorado, Pennsylvania, and Washington have numerous and complex requirements.

Since many of these reporting requirements can be quite labor intensive, with significant consequences for non-compliance, not to mention concerns about antagonizing customers by issuing the required reports and notices, we expect that many remote sellers will choose registration and collection of the tax instead of complying with the state’s use tax reporting requirements.

Currently, the following jurisdictions have some type of remote seller use tax reporting requirement: Alabama, Colorado, Georgia, Louisiana, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, South Dakota, Tennessee, Vermont, and Washington.

If the physical presence nexus standard survives the challenge in South Dakota v. Wayfair, you can expect most, if not all, states that impose a sales and use tax to pass some type of complex use tax reporting requirements, forcing remote sellers to answer the dreaded question: to report, or to collect and remit.

Please consult with your state and local tax advisor if you have any questions regarding state-specific reporting requirements.

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