As a result of the 2017 Legislative Session, Minnesota became the first state in the nation to impose sales and use tax collection duties on marketplace providers, such as Amazon, eBay, and Etsy and other similar companies. The new law is scheduled to take effect in 2019. Like several other states, Minnesota is attempting to capture sales tax dollars that would otherwise slip through the cracks and go uncaptured.
The Issue for Minnesota and Other States
Quill Corp. v. North Dakota, a 1992 United States Supreme Court case, established that a state can only impose sales tax burdens on businesses with sufficient physical presence, or nexus, with that state. Physical presence means offices, branches, warehouses, employees, etc. located within the state. The existence of customers alone (i.e., economic presence) does not create sufficient nexus for states to impose sales tax collection obligations on out-of-state businesses selling to in-state customers.
Under Quill, when a retailer with no physical presence in a state makes an online or remote sale to someone in that state, the sales tax goes uncaptured by the state in which the product was sold and the purchaser is located. A 2017 study conducted by the National Conference of State Legislatures and the Council of Shopping Centers estimated that there was $25.9 billion in uncollected sales tax on electronic and non-electronic remote sales in the United States in 2015 (“Uncollected Sales & Use Tax from Remote Sales: Revised Figures,” NCSL & ICSC; March 2017”). Add this reality with the fact that many brick-and-mortar retailers are experiencing a decline in sales, meaning they are generating less sales tax dollars, and several states are looking for ways to make up for their shortfall in sales tax revenue.
A growing number of states have tried to combat the effects of Quill by enacting bright-line nexus tests under which physical contact is unnecessary. Alabama, Indiana, North Dakota, South Dakota, Tennessee, Vermont, and Wyoming have all taken this approach. Alabama requires remote retailers with more than $250,000 of in-state annual sales to collect and remit sales tax. South Dakota’s statute requires remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax. Tennessee’s bright-line test applies to in-state sales exceeding $500,000, while the threshold is set at $100,000 in Indiana, Vermont, and Wyoming.
Other states, like Colorado and Louisiana, have enacted remote seller notification statutes. These statutes impose onerous tax reporting requirements on out-of-state, unregistered retailers with a certain dollar amount of in-state sales. These retailers are required to advise in-state customers of the customer’s potential liability for consumer use tax and provide the customers with an annual statement of their purchases. In addition, the retailers must typically file a report of these sales with the respective state’s department of revenue. The overarching goal of states enacting this type of legislation is to impose information reporting costs of such magnitude that out-of-state retailers register for sales tax with the state regardless of whether they have sufficient nexus.
The New Law in Minnesota
Another approach states are taking, including Minnesota, provides that a retailer establishes nexus with a state through its arrangements with a marketplace provider. The marketplace provider is then held responsible for collecting sales tax on sales made by the retailer via the provider’s online platform. States implementing this type of legislation recognize the fact that many remote retailers are using marketplace provider platforms to promote and distribute their products. In addition, marketplace providers often take care of invoicing and other administrative matters related to the sale, so why not make them responsible for collecting and remitting the sales tax from the consumer on such sales?
The new law in Minnesota, 2017 House File 1 (H.F. 1), amended the definition of “retailer maintaining a place of business in [Minnesota]” to include a retailer who makes sales through a “marketplace provider” operating in Minnesota. “Marketplace provider” is defined as any person who facilitates a retail sale by a retailer through listing or advertising items for sale, or entering into agreements with third parties collecting payments from customers and transmitting such payments to the retailer.
The expanded definition essentially creates a nexus for online retailers selling goods through a marketplace provider, regardless of whether the retailer has a physical presence in Minnesota. Retailers with in-state taxable sales of less than $10,000 per year, however, are exempt and are not considered to be maintaining a place of business in Minnesota.
H.F. 1 requires the marketplace provider to collect and remit sales and use tax for the retailer’s sales it facilitates. In other words, it shifts the tax collection burden from the retailer to the marketplace provider, even if the retailer doesn’t have a physical presence in Minnesota. However, if the retailer itself registers to collect sales and use tax in Minnesota, then the burden of tax collection and remission is on the retailer, not the marketplace provider.
The law also modifies the definition of “affiliated entities,” adding criteria by which an affiliate of a retailer is deemed to be a related party to the retailer. A retailer with a related, in-state affiliate is required to collect and remit sales and use tax.
The Minnesota Legislature estimates that these sales tax nexus expansion provisions will raise more than $4 million in revenue per fiscal year. A number of other states, including New York, Rhode Island, Texas, and Washington, have proposed similar legislation requiring marketplace providers to collect tax from third-party sales on their platforms, but Minnesota has been the only state to pass such legislation.
Effective Date and Outlook of the New Law
The effective date for the sales tax nexus expansion provisions of H.F. 1 is July 1, 2019. These provisions could become effective sooner, however, if the U.S. Supreme Court overturns its decision in Quill or if a federal law is enacted which allows a state to require retailers without a physical presence in the state to collect that state’s sales or use tax.
By pushing the effective date out two years, or until the Supreme Court overturns Quill, the Minnesota Legislature undoubtedly recognizes that the new law contradicts the “physically present” precedent set by Quill. It is likely that the Legislature is hoping for further guidance from the U.S. Supreme Court in the next two years. However, even if Quill is overturned, there is potential that Minnesota’s new sales tax provisions in H.F. 1 will be challenged by marketplace providers under other federal grounds, such as the Due Process Clause and the Internet Tax Freedom Act.
*** DISCLAIMER: This article should not be deemed legal advice. You should always consult with an attorney about your specific circumstances and legal rights and obligations. ***
Aaron Kolquist is an attorney with the Fryberger Law Firm, practicing primarily in the business, corporate, and labor & employment areas.