Following the Supreme Court decision in South Dakota v. Wayfair in June of 2018, New York, like nearly every other state that imposes a general sales tax, eventually began enforcing economic nexus. But New York took its time explaining its economic nexus position. The Tax Department issued a Notice in January, 2019, explaining that Wayfair caused certain seemingly dormant provisions in New York’s Tax Law to become “immediately effective.” These provisions, sitting around unused by the Tax Department since the 1980s, indicated that an out-of-state vendor with no physical presence in New York will be required to collect and remit New York sales tax if, during the immediately preceding four sales tax quarters:
- the business made more than $300,000 in sales of tangible personal property delivered in the state; AND
- the business conducted more than 100 sales of tangible personal property delivered in the state.
In May of 2019, the Tax Department issued Frequently Asked Questions detailing the operation of its economic nexus rule. One such question confirmed that, despite the fact that the Tax Department didn’t get around to telling us that it had economic nexus provisions in the law until January 2019, these provisions would be enforced as of the date of the Wayfair case (June 21, 2018).
Finally, on June 24, 2019, the Legislature amended the Tax Law to change the annual sales threshold dollar amount from $300,000 to $500,000, effective retroactive to June 21, 2018. Just this week, the Tax Department issued TSB-M-19(4)S to publicize the increase. Following the initial flurry of activity where states enacted their economic nexus rules, several states later “tweaked” these rules to either change the dollar threshold amount or to eliminate the transaction component of their economic nexus tests. For example, in December 2018, the California Department of Tax initially published Special Notice L-565 imposing economic nexus thresholds of $100,000 in sales or 200 separate transactions. Then, on April 26, 2019, California passed Assembly Bill No. (AB) 147 (Stats. 2019, ch. 5) which requires retailers located outside of California to collect tax if, during the preceding or current calendar year, total combined sales of tangible personal property for delivery in California exceed $500,000. Thus, the state increased the dollar threshold and eliminated the transaction threshold.
As if all this wasn’t enough to track, in March of this year, the New York Tax Department issued an advisory opinion in which it concludes, for the first time, that an online marketplace can be held liable for the sales tax due on transactions that the marketplace facilitates. In other words, the Tax Department took the position, contrary to previously published guidance (see our previous analysis here), that marketplaces can be liable for tax on the transactions that occur on their platforms, even though they are not the seller of record in these transactions. Though the state had budget legislation pending at the time that imposed similar obligations on marketplaces, the Tax Department decided not to wait for the legislation to become law, and simply imposed the rule by administrative pronouncement.
Well, the budget legislation imposing tax obligations on marketplaces was eventually signed into law in April. This likely avoided the inevitable legal battle that would have ensued had the Tax Department had no firmer legal foundation for its position than its own advisory opinion. The Tax Department issued a Memorandum in May acknowledging this new legislation. Then, two days later, it issued detailed guidance that fully fleshed out the new sales tax requirements imposed on marketplaces. The guidance parroted the legislation by defining a marketplace provider as “a person who, pursuant to an agreement, facilitates sales of tangible personal property by a marketplace seller or sellers.” The guidance further states that “[a] person ‘facilitates a sale of tangible personal property’ when:
- the person provides the forum in which, or by means of which, the sale takes place or the offer of sale is accepted, including an internet web site, catalog, shop, store, booth or similar forum; and
- the person, or an affiliate, collects the receipts paid by a customer to a marketplace seller for a sale of tangible personal property, or contracts with a third party to collect the receipts. Persons are affiliated if one person has an ownership interest of more than five percent, whether direct or indirect, in another, or where an ownership interest of more than five percent, whether direct or indirect, is held in each of such persons by another person or by a group of other persons that are affiliated persons with respect to each other.
To be a marketplace provider, a person must meet both criteria in the above definition. For example, a person that provides a forum for third parties to make sales or the offer of a sale is not a marketplace provider if it (or an affiliate, as defined above) does not collect the payment paid by a customer, or if it has not contracted with a third party to collect the payments. It is important to note that the guidance specifically references that tangible personal property specifically includes “sales of prewritten computer software that is downloaded or remotely accessed by the customer.” Excluded from the definition of tangible personal property are:
- services (for example, transportation services or electric service – be careful with information services as they can have a software component)
- restaurant food (this seems to exempt services like Seamless, though we know from personal experience that that service charges and collects tax)
- hotel occupancy (note, however, that room remarketers need to collect tax as well), or
- admissions to a place of amusement.
The legislation and the guidance specifically apply New York’s new economic nexus rules to marketplace providers. For example, the guidance states,
A person with no physical presence in New York State who facilitates sales for marketplace sellers as described above is a marketplace provider and is required to register for sales tax purposes and collect and remit sales tax if, in the previous four sales tax quarters:
the cumulative total of the person’s gross receipts from sales made or facilitated of tangible personal property delivered into the state exceeded $300,000, and
such person made or facilitated more than 100 sales of tangible personal property delivered in the state.
The June 24, 2019 legislation that increased the economic nexus sales threshold from $300,000 to $500,000 (discussed above) also increased the threshold for marketplace providers as well. Finally, just last month, the Tax Department updated its marketplace guidance to acknowledge the increased sales threshold.
A marketplace provider cannot refuse to collect tax on a marketplace seller’s sales, even if the seller is registered for sales tax purposes. Marketplace providers must keep records and cooperate with the Tax Department to ensure the proper collection and remittance of tax imposed, collected or required to be collected. To help facilitate compliance, a marketplace provider must issue the new Form ST-150, Marketplace Provider Certificate of Collection, to its marketplace sellers for sales of tangible personal property that it facilitates for such sellers. A marketplace seller who is registered to collect New York State sales tax is relieved from the duty to collect tax on a sale of tangible personal property and should not include the receipts from the sale in its taxable receipts if:
- the marketplace seller can show that the sale was facilitated by a marketplace provider from whom the marketplace seller has received, in good faith, a properly completed Form ST-150, Marketplace Provider Certificate of Collection, certifying that the marketplace provider is registered to collect sales tax and will collect sales tax on all taxable sales of tangible personal property by the marketplace seller facilitated by the marketplace provider; and
- any failure of the marketplace provider to collect the proper amount of tax on a sale was not the result of the marketplace seller providing the marketplace provider with incorrect or insufficient information. (This relief of liability does not apply if the marketplace seller and marketplace provider are affiliated, as defined above).
As you can see, it has been quite a busy year for economic nexus in New York. Now imagine having to follow similar stories in the other 43 states that impose a general sales tax and have issued economic nexus guidance. And we’re just talking about sales tax here. There are economic nexus considerations for income tax as well. For example, New York’s corporate income tax imposes economic nexus on entities that have has at least $1 million in receipts sourced to New York or if an entity has at least $10,000 in receipts sourced to New York and the total New York receipts of related corporations in a combined reporting group are at least $1 million. We anticipate a future flurry of economic nexus provisions for income tax purposes across the states in the near future. It’s hard enough for us to keep up, and we’re tax lawyers! We sympathize with business owners trying to focus on running and growing a business that sells over the internet. Please give us a call if you have any questions regarding these complex issues.
