Leave cookies? Pay sales tax, says Massachusetts

Massachusetts just devised a fairly brilliant scheme for collecting sales tax from out-of-state sellers.picseli-6730

The Department of Revenue (DOR) recently published Directive 17-1: Requirement that Out of State Internet Vendors with Significant Massachusetts Sales Must Collect Sales or Use Tax. This guidance from the DOR lays out the conditions under which “internet vendors” that ship into Massachusetts must register to collect and remit sales tax. Since almost all websites use “cookies”, the directive could have a significant impact.

What is a cookie?

Cookies are small files that are left on computers by websites either temporarily (“session” cookies) or for longer periods of time (“persistent” cookies) that help eCommerce vendors track, among other things, progress in the shopping cart checkout process. Since these files reside on computers that exist physically in Massachusetts, are owned by the vendor (not the customer), and help facilitate sales, according to Massachusetts that triggers “in-state business activity” and therefore triggers a requirement to register to collect and remit sales taxes.

Does it apply to wineries?

Massachusetts is one of the very few states that wineries can ship to that does not require sales tax registration as a condition of receiving a direct shipping permit. To determine whether this new directive would even apply to wineries, we have to answer a few questions:

  1. Do wineries leave cookies?
    According to Andrew Kamphuis, former Founder and CEO of Vin65, “It’s next to impossible to have a shopping cart without having cookies. Almost all wineries have an eCommerce site, and I’m not aware of any wine industry eCommerce companies that do not leave cookies.”
  2. Are wineries “large Internet vendors”?
    The directive only applies to internet vendors that do more than $500,000 in sales in Massachusetts AND more than 100 transactions per year. It would not be uncommon for a winery to do 100 transaction in Massachusetts per year. But, $500,000 in sales per year is a significant amount. Let’s say you sell your wines for $50 per bottle, and make 2 different 3-bottle club shipments per year to 100 different Massachusetts customers. That’s only $30,000 in sales per year, so well below the $500,000 threshold.
  3. Will this directive take effect?
    The directive is designed to take effect on July 1st. However, it seems likely that at least one group will challenge the law’s constitutionality in courts. According to NPR, NetChoice is already pursuing an injunction to block enforcement before it takes effect.
  4. Does the directive apply to out-of-state wine shipments?
    Even if this directive is found to be constitutional, it’s unlikely that wine shipments would be subject to sales tax even for those over $500,000 in sales. Because the ABCC Advisory on wine shipping makes no mention of sales tax but explicitly requires registration with DOR for excise taxes, it seems clear that sales tax are not required. Further, a 2010 ballot initiative repealed the application of sales tax to sales of alcohol that are subject to excise taxes.

Why does this matter?

As we’ve discussed in the past, sales tax reform is coming. States are looking for any way they can to work around the Quill Supreme Court decision, and they’re getting closer and closer to cracking that code. This new attempt by Massachusetts is just another example of a creative solution to compel out of state sellers to pay sales taxes, joining Colorado’s “tattletale” reporting rules (which were upheld as constitutional and are now being copied by multiple states), “economic nexus” rules in multiple states that are working through the courts, and “click-through nexus” in multiple states. Massachusetts accelerates the march to reform and in very short order, the issue of sales tax on eCommerce orders will be settled either by Congress or the Supreme Court.

Until then, fast changes and a lot of uncertainty will exist at the state level. This directive in Massachusetts will be challenged, and we’ll wait to see if an injunction is granted. If it survives the courts, other states will copy it. Massachusetts chose a very high threshold of $500,000, but other states that follow would likely have a much lower annual revenue threshold ($100,00 as the standard in Colorado, for example) or separate transaction threshold. Even though this directive will likely not apply to any wineries, it’s worth staying on top of the ever-changing sales tax landscape.

Sales Tax Reform is Coming

jacob-hilton-228976On Saturday, the list of states where Amazon collects and remits sales tax on purchases grew to 46, including the District of Columbia. Even though technically that means they added only the states of Hawaii, Idaho, Maine and New Mexico to the roster, this is a watershed moment for sales and use tax reform. Amazon now collects sales tax in ALL states that require it (only the “NOMAD” states of New Hampshire, Oregon, Montana, Alaska, and Delaware have no state-wide sales tax requirement). This is a significant symbolic change that will tilt the scales towards sales tax reform.

Amazon’s gradual policy change

Ever since the Quill decision of 1992, states have had a difficult time compelling out-of-state and online sellers to register for sales tax in their states. In fact, Amazon would battle states and refuse to register for sales tax under the cover of the Supreme Court’s ruling in Quill, which said that states can not require sellers to remit sales taxes if they do not have a physical presence (“substantial nexus”) in the state. Amazon could only do this, however, in states where they did not own a warehouse or an office.

Starting in about 2012, Amazon began changing their philosophy around sales tax. Recognizing that consumer behavior was shifting around delivery expectations, Amazon began building warehouses around the country to enable faster delivery. To do this though, they were forced to negotiate with the states where they wanted to build warehouses, including an agreement to start collecting and remitting sales taxes. Since 2012, consumer expectations have continued to shift, and Amazon has moved in lockstep to meet demand with increasingly fast and convenient delivery options. Accordingly, and especially over the last year, Amazon rapidly relented to the remaining states where they weren’t collecting sales tax.

States target Amazon’s competitors

Now that Amazon is collecting sales tax in all states that require it, the pressure is on Amazon’s competitors as states look to compel out-of-state sellers to register and remit sales taxes. Because the states are hamstrung by Quill, and Congress has yet to push a federal sales tax bill over the finish line, states are increasingly inventing creative ways to circumvent Quill. Forcing sellers to register and remit is far more effective than collecting use tax individually from in-state residents.

Colorado found an interesting way to work around Quill by requiring out-of-state sellers to report their transactions to the Department of Revenue if they don’t register for sales tax. In other words, if out-of-state sellers choose not to voluntarily register to collect sales tax in Colorado, they are forced to rat out their customers so the state can collect use taxes from them. This scheme, originally enacted in 2010, was upheld as constitutional recently following multiple years of constitutional challenges by Direct Marketing Association, resulting in multiple states looking to replicate Colorado’s model. Colorado will start enforcing this law on July 1st.

If Congress does not act, the Supreme Court will

Many other states are in the process of pushing the limits of Quill with the explicit goal of reaching the US Supreme Court (SCOTUS). South Dakota, for example, enacted an “economic nexus” law that was designed to make it all the way to SCOTUS. An immediate challenge is currently on its way to the South Dakota Supreme Court. Indeed, if Congress fails to act, one if not multiple state laws will make its way to SCOTUS and sales tax reform could come from an opinion overturning Quill from the highest court in the nation.

Although Congress has many priorities that have been laid out in this important year for the new administration, sales tax may end up on the docket this year or next given the momentum from Amazon’s change coupled with the increased challenges states and courts are facing.  The only question is whether sales tax reform will come prior to a ruling by SCOTUS or following.

Several proposals have been floated over the last five years or so in Congress. The most successful attempt was the Marketplace Fairness Act (MFA) of 2013. MFA would perpetuate the current incredibly complicated destination-based sales tax scheme while giving states the teeth they need to enforce their local laws. Rep. Bob Goodlatte (R-VA), on the other hand, would like to move to an “origin-sourcing” scheme in an attempt to simplify the sales tax laws. Neither proposal is perfect, so hopefully Congress can compromise and create a bill that’s fair to both large and small sellers.

The route to reform is not perfectly clear yet, but one way or the other we’ll have a significantly different sales tax landscape over the next 1-2 years.

What this means for wineries

Wineries that ship products directly to consumers can currently ship to 45 states with the proper permits. Most of those states require the wineries to first register with the Departments of Revenue for sales tax remittance prior to obtaining their direct shipping permit. Yet some of those states still do not require sales tax registration. Minnesota, for example, currently does not require sales tax registration. The current flurry of activity and momentum towards sales tax reform will surely mean that wineries should prepare for the eventuality of having to register and remit sales taxes in all non-NOMAD states that allow direct shipments.

 

How to report your Colorado consumer use tax from Amazon

Below I’ll walk you through a step by step guide for how to figure out (hack) how much use tax you (as an individual) should be paying to Colorado. But first, here’s just a little background, without getting too far into the weeds, on why you have to do this in the first place!

Even though I’ve been living in Colorado for almost twenty years, and worked the last 12 in the compliance and tax industries, it didn’t become clear to me until a few years ago that I should be paying “consumer use tax” on purchases I made online. In the Direct Marketing Association v Brohl decision from the 10th Circuit, the introduction provides a pretty good explanation for this, and also acknowledges that very few people actually pay this tax.

When a neighborhood bookstore in Denver sells a book, it must collect sales tax from the buyer and remit that payment to the Colorado Department of Revenue (“Department”). When Barnes & Noble sells a book over the Internet to a Colorado buyer, it must collect sales tax from the buyer and remit. But when Amazon sells a book over the Internet to a Colorado buyer, it has no obligation to collect sales tax. This situation is largely the product of the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that, under the dormant Commerce Clause doctrine, a state may not require a retailer having no physical presence in that state—e.g., Amazon as opposed to Barnes & Noble—to collect and remit sales tax on the sales it makes there.

Faced with Quill, many states, including Colorado, rely on purchasers themselves to calculate and pay a use tax on their purchases from out-of-state retailers that do not collect sales tax. But few in Colorado or elsewhere pay the use tax despite their legal obligation to do so.

To get around the fact that they can’t compel out of state businesses to collect and remit sales tax on sales that originated out-of-state as well as that very few Colorado residents actually collect tax, Colorado passed a law, which has recently been upheld as constitutional, that requires sellers to report their sales data to the Colorado Department of Revenue (DOR). In effect, this law forces sellers that choose not to register with the DOR to rat out their own customers, making it much easier for DOR to then go after Colorado residents for not paying use tax. Because of this, I started paying consumer use tax on my purchases for the past few years.

Almost all of my purchases from out of state sellers are on Amazon, so I’m going to focus on Amazon in this guide, but the same principles can be used for any other sellers. This process can obviously also be used for other states that require consumer use tax. Note, this is not a perfect process, and circumstances vary, but it should give you a general sense of how to make the calculations.

Step by Step Guide for Paying Consumer Use Tax in Colorado for Amazon Purchases

  1. Go to Your Account -> Your Orders -> Order History ReportsScreen Shot 2017-03-10 at 10.51.05 AM
  2. Set “Report Type” to “Orders and shipments”, select the “Last Year” quick set option to filter on just your shipments from last tax year. Type in a name for your report (like “2016 Tax  Report”) so you can easily access it in your account if you ever need to come back to it. Click “Request Report” to run the report.
  3. Amazon will then provide a .csv file that you can them open with Google Sheets (which I use) or Microsoft Excel.
  4. Filter on Column L (Shipping Address State) to show only the shipments that were shipped to you in Colorado. You don’t want to include gifts or other shipments you sent to other states.
  5. Filter on Column T (Tax Charged) to show only purchases where no tax was charged. Depending on the seller, sales tax may or may not be collected on each transaction. You want to pay only on the transactions where sales tax was not collected.
  6. Sum the values in Column U (Total Charged) to determine the value of transactions for which you need to pay consumers use tax.Screen Shot 2017-03-10 at 11.34.26 AM
  7. Complete or use as a guide form DR 0104US, which will ask you to multiply by the state consumer use tax rate of 2.9% as well as the rates from any special districts. Note: to determine if you live in a special district, use this handy online lookup tool.
  8. Report the number from box 7 of the DR 0104US on Line 14 of your Colorado Individual Income Tax form 104.

Whew! Not exactly easy. If you have a better way, I’d love to hear it!