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Covid-19 Interrupts State Efforts to Modify Sales Tax Codes

April 21, 2020, 7:28 PM

States are being frustrated in their efforts to establish remote sales tax requirements in a political climate dominated by the coronavirus pandemic, a report for the Multistate Tax Commission found.

A Tuesday update on the states by Richard Cram, director of the MTC’s National Nexus Program, showed that Covid-19 interrupted legislation inspired by the Supreme Court’s 2018 South Dakota v. Wayfair ruling and regulatory initiatives in Kansas, Missouri, Colorado, and Louisiana. Cram gave his update during the annual Spring Committee meetings of the MTC.

Missouri and Florida are the only sales-tax states that have still not asserted their authority to require remote vendors to collect and remit sales taxes. Florida closed out its legislative session, but three bills were pending in Missouri when the virus caused the Legislature to shut down. Kansas has asserted its remote sales tax authority by rule and was seeking to do so legislatively when the contagion sent lawmakers home. Three bills had been introduced there as well, Cram reported.

Colorado and Louisiana had bills concerning local sales tax simplification; those bills were put on ice thanks to the virus, Cram said. Colorado’s Legislature is coming back in May, but the bill sponsors said their measures face an uphill battle as lawmakers prioritize legislation dealing with the virus.

Tennessee, Utah, and Georgia managed to enact marketplace facilitator laws in 2020, Cram said.

Wayfair created a framework for states to collect sales taxes from remote retailers by tossing the physical presence standard affirmed in 1992’s Quill Corp. v. North Dakota. The majority in the 5-4 Wayfair ruling suggested strongly that South Dakota’s law would pass constitutional muster.

Since the Wayfair decision, all but two of the sales-tax states have begun imposing remote sales tax based on some measure of economic activity, instead of physical presence. And more than 30 states have passed marketplace-facilitator laws, which place a duty to collect and remit sales tax on large websites that broker transactions.

Maine Looks at Digital, Nexus

Cram pointed to Maine as a state that might use some of the lessons from Wayfair to expand the tax base and raise some new revenue.

While Maine’s Legislature remains on lockdown, the state is still considering a bill (L.D. 2011) that would tax digital services and expand the state’s approach on economic nexus to the corporate income tax.

A key feature of L.D. 2011 would expand the menu of services subject to the 6% service provider tax to include “digital audio-visual and digital audio services.” A second feature would impose a factor presence nexus standard within Maine’s corporate income tax emphasizing sales into the state. The new standard would subject in-state and remote businesses to the income tax if they exceed any of four thresholds: $250,000 of Maine property; $250,000 of Maine payroll; $500,000 of Maine sales; or, 25% of the corporation’s Maine property, payroll or sales.

Michael J. Santo, a senior tax manager with the accounting firm WIPFLi LLP in Augusta, Maine, expects action on the measure when lawmakers are called back to the state capitol.

“I think this will eventually pass, but it’s been placed on the back burner until the state figures out what it needs to do in response to Covid-19,” Santo said.

Another Model Statute?

The Uniform Law Commission is taking a stab at a model state statute affecting e-commerce, but has the commission arrived at the party late?

The ULC formed a committee to study “state taxation of online sales and collection of taxes.” Ideally the group hopes to draft a uniform state law with a special focus on marketplaces. The committee is chaired by Utah Sen. Lyle Hillyard (R), and Professor Adam Thimmesch of the University of Nebraska College of Law will serve as staff reporter.

The ULC has had some successes over the years, including the Uniform Commercial Code. It also hammered out the Revised Uniform Unclaimed Property Act, but the model has not been widely adopted. It is unclear whether the commission’s approach to e-commerce will be received warmly among the states and the National Conference of State Legislatures, which approved its own model statute earlier this year.

“Not only is the ULC effort seen as redundant but potentially conflicting—a result that would undermine the goal of uniformity already being attempted by the NCSL,” tax attorneys from the law firm McDermott Will & Emery wrote in a blog post Monday.

Sales Tax Buzzsaw

Businesses shifting their operations to manufacturing equipment needed in the fight against Covid-19 may be walking into a sales tax compliance buzzsaw as they open new sales channels and pursue new customers in new jurisdictions.

Charles Maniace, vice president of regulatory analysis and design for the tax compliance software company Sovos, warned some manufacturers could be caught off guard by the patchwork of state and local tax rules that have emerged since Wayfair. The risks are particularly high for manufacturers making ventilators, personal protective equipment, and other medical devices, and selling those products directly to hospitals, municipalities, and consumers in multiple states.

In many cases, manufacturers are unfamiliar with state and local sales tax codes because they sell products to wholesalers or retailers, Maniace said. But those manufacturers become retailers with sales tax obligations when they begin selling products to end-users across the county.

Maniace pointed to another complex issue manufacturers must consider: exemption certificates. Many users of medical equipment are tax-exempt entities, including hospitals and units of government. While these exempt organizations relieve businesses of tax collection duties, exemption certificate programs differ across the states and proper administration can prove challenging.

—With assistance from Tripp Baltz in Denver and Allyson Versprille in Washington, D.C.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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