This article originally was published by Law360 on October 10, 2017.
States historically have had one major impediment to their ability to collect sales tax — the decision in Quill Corporation v. North Dakota to uphold a physical presence test standard for determining nexus. Since the Quill decision, states have applied various approaches to limit or even eliminate Quill’s physical presence nexus standard. These approaches included lobbying Congress to provide federal legislation that would redefine nexus, enacting state “click-through” nexus statutes, and taking aggressive audit positions that limit the applicability of physical presence nexus.
Recently, states are employing two new strategies: (a) requiring online “marketplaces” that facilitate sales to collect sales tax or comply with certain informational reporting requirements; and (b) requiring sellers that do not have a physical presence in a state to collect sales tax if the seller meets certain sales thresholds.
Distinguishing the Obligations of a Marketplace Provider
Three states recently enacted legislation aimed at online “marketplaces.” Minnesota and Washington enacted legislation generally requiring online marketplaces that facilitate sales (“marketplace providers” or “facilitators”) within the state to collect sales tax on those sales. Rhode Island has enacted legislation that imposes an informational reporting requirement on “retail sale facilitators” that facilitate sales into the state. Each state has defined the term “marketplace provider” or “facilitator” in materially different ways.
On May 30, 2017, Minnesota became the first state to create a sales tax collection requirement for a “marketplace provider.” A “marketplace provider” is defined, in relevant part, as “any person who facilitates a retail sale by a retailer” by: (a) listing or advertising the retailer’s products or services on its website; and (b) collecting payments from the retailer’s customers and transmitting those payments to the retailer.
The legislation, H.F. 1, requires a “marketplace provider” to collect and remit sales tax for the retailer’s sales it facilitates within the state unless the retailer selling on the marketplace is already registered to collect Minnesota sales tax. There is also a de minimis threshold — a marketplace provider is not required to collect tax under these provisions if it has less than $10,000 of sales into the state. The law goes into effect on July 1, 2019, or sooner if Quill is overturned.
Soon after Minnesota enacted H.F. 1, Washington enacted H.B. 2163 on July 7, 2017, requiring a “marketplace facilitator” to either elect to: (a) collect Washington sales tax on sales made through its website on behalf of retailers that do not have physical presence in the state; or (b) comply with use tax reporting requirements, if it has at least $10,000 of gross receipts from Washington retail sales or has physical presence with the state.
A “marketplace facilitator” is defined under H.B. 2163 as a person that contracts with a seller to facilitate the sale of the seller’s products into Washington through a physical or electronic marketplace and engages, directly or indirectly, in certain specified activities. Specified activities include transmitting or communicating the offer or acceptance between the buyer and seller, and owning or operating the infrastructure or technology that brings buyers and sellers together.
The facilitator must also engage in at least one of the specified activities related to the seller’s products, such as payment processing, fulfillment or storage services, listing products for sale, setting prices, branding sales as those of its own, taking orders, advertising, or providing customer service or accepting or assisting with returns or exchanges.
If the marketplace facilitator does not elect to collect tax, it must provide a number of notifications, including the following:
The law goes into effect on Jan. 1, 2018.
Rhode Island Legislation
Rhode Island’s new legislation requires “retail sale facilitators” to file an informational report with the Department of Revenue. A “retail sale facilitator” is defined, in relevant part, as a person that facilitates retail sales by listing or advertising a retailer’s taxable products or services on a website and collects payment for such goods from third-party customers.
The informational report must detail the sales facilitated by the retail sale facilitator so long as the retail sale facilitator has sales within the state in excess of $100,000 or 200 or more separate transactions into the state. This legislation also requires out-of- state retailers that are making sales within the state through a retail sales facilitator to collect sales tax if the retailer meets the foregoing sales thresholds.
Rhode Island does not require facilitators to collect tax, but does impose informational reporting requirements on these entities. Reporting requirements begin on January 15, 2018.
An important difference among these “facilitator” regimes relates to how they define marketplace providers or facilitators.
For example, Washington’s definition of “marketplace facilitators” does not require the facilitator to actually collect the sales proceeds from goods sold to the purchaser. Merely facilitating sales appears to be sufficient under the new Washington legislation. However, both Rhode Island and Minnesota require actual collection of gross proceeds from goods sold to the purchaser before the facilitator is obligated to collect tax or be subject to the reporting requirements.
To demonstrate the complexities of these laws, if a company (Company A) facilitates retails sales for retailers on its website, has $15,000 sales and 100 separate sales transactions in these three states, and collects sales proceeds from the purchasers on behalf of retailers, then Company A will be required to collect tax in Minnesota and subject to Washington’s election. Company A would not be required to comply with Rhode Island’s informational reporting requirements because it does not meet the state’s $100,000 sales revenue or 200 separate transaction threshold.
If all facts remained the same except Company A did not collect sales proceeds from the purchasers, then Company A would still be subject to Washington’s election, but would no longer be required to collect tax in Minnesota because Minnesota requires actual gross process collection from the purchaser to be considered a “marketplace provider.”
Distinguishing the Obligations of a Remote Seller
In addition to tax obligations imposed on facilitators, the Washington and Rhode Island legislation provide compliance requirements for remote sellers. Maine also recently enacted legislation applicable to non-physically present retailers.
Washington provides an election — a collection or reporting requirement — for “remote sellers” similar to the election required for marketplace facilitators.
A “remote seller” is as any seller, other than a marketplace facilitator or referrer, who does not have a physical presence in Washington and makes retail sales to Washington purchasers. Similar to marketplace facilitators, remote sellers must have at least $10,000 of gross receipts from Washington retail sales.
Rhode Island Legislation
Unlike Washington, Rhode Island imposes different compliance obligations on “retail sale facilitators” and “non-collecting retailers.” While “retail sale facilitators” are only subject to informational reporting requirements, “non-collecting retailers” must either: (a) collect sales tax; or (b) comply with certain reporting requirements.
If the “non-collecting retailer” chooses to not register and collect sales tax, the non-collecting retailer must comply with the following reporting requirements:
The “non-collecting retailer” must also annually attest that it has complied with these requirements to the Division of Taxation. A “non-collecting retailer” must also have sales in excess of $100,000 within Rhode Island or 200 or more separate transactions into the state in order to be subject to the collection or reporting obligations.
A “non-collecting retailer” includes a person who uses in-state software to make sales of taxable items into Rhode Island. “In-state software” is defined as software used by in-state customers on their computers or other electronic or communication devices, including cached files or software, “cookies," or other data tracking tools.
A “non-collecting retailer” also includes a person who sells, leases or delivers into the state or participates in certain activities in connection with selling taxable items into Rhode Island, including: (a) direct response marketing activities through a retail sale facilitator, or other third-party; (b) entering into a click-through agreement with a person with a physical presence in the state who receives a fee or commission for potential in-state customers referrals; or (c) using a retail sale facilitator to sell, lease or deliver taxable items into the state.
A person is also considered a “non-collecting retailer” if the person uses a sales process that includes listing, branding or selling taxable items, soliciting, processing orders, fulfilling orders, providing customer service and/or accepting or assisting with returns or exchanges occurring in Rhode Island. A “non-collecting retailer” also includes a person who sells taxable items in Rhode Island through a retail sale facilitator with a physical presence in the state.
Lastly, a “non-collecting retailer” includes a person who is related to a person with physical presence in Rhode Island that performs certain activities, such as selling taxable items that are substantially similar to the items sold by the non-collecting retailer, maintaining a facility that facilitates the sales of the non-collecting retailer, using substantially similar trademarks, delivering property into Rhode Island on behalf of the non-collecting retailer or sharing management, business systems, business practices or engaging in intercompany transactions.
Maine’s new legislation, S.P. 483, requires an out-of-state seller to collect sales tax on its sales made into the state if, in a given year, the seller’s sales exceed $100,000 into the state or the seller made at least 200 separate sales transactions into the state.
Maine’s legislation also contains a unique provision that allows the state to bring a declaratory action against any person that it believes meets the foregoing requirements to collect tax regardless of whether the state has initiated an audit of that person. The law goes into effect on Oct. 1, 2017.
Defining Remote Sellers
Each of these states addresses imposition of a sales tax collection obligation on remote sellers using a different approach.
For example, Maine simply sets sales volume and frequency thresholds for out-of- state sellers to determine whether these sellers must collect sales tax. Maine’s threshold ($100,000 in-state gross revenue or 200 separate in-state sales) is significantly higher than Washington’s threshold, which only requires $10,000 gross receipts from Washington sales.
On the other hand, in addition to a sales volume and frequency threshold like Maine ($100,000 in-state gross revenue or 200 separate in-state sales), Rhode Island has enacted a detailed definition of the term “non-collecting retailer” that focuses on numerous activities of the seller to determine whether a collection or reporting obligation exists. The definition of a “non-collecting retailer” not only captures retailers who do not have a physical presence in the state, it also encompasses retailers that may be considered to have sufficient nexus under attributional nexus theories, such as “click-through” and affiliate nexus.
The obligations of a remote seller also differ in each of these states. Both Washington and Rhode Island give remote sellers a choice between collecting sales tax and completing informational reporting. In these states, a remote seller can avoid collecting the state’s sales tax as long as it complies with the state’s elaborate informational reporting requirements. In contrast, Maine does not provide an informational reporting option to remote sellers as an alternative to sales tax collection.
The applicability of these new statutory collection and reporting requirements in Minnesota, Washington, Rhode Island and Maine vary greatly. As states continue to consider adopting similar regimes targeted at marketplaces and remote sellers, the variances among the states will widen. Taxpayers should cautiously evaluate the applicability of each state’s regime and obligation on a separate basis.
 Quill Corp. v. North Dakota By & Through Heitkamp, 504 U.S. 298 (1992) (upholding the physical presence test applied in Nat’l Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967)).
 2017 Minn. Sess. Law Serv. 1st Sp. Sess. Ch. 1 (H.F. 1), 82 (West).
 Id. at 83.
 Id. at 84.
 Id. at 103.
 2017 Wash. Legis. Serv. 3rd Sp. Sess. Ch. 28 (H.B. 2163), 7 (West).
 Id. at 11.
 Id. at 12-13.
 Id. at 12.
 Id. at 15.
 Id. at 7.
 Id. at 67.
 2017 R.I. Laws (17-H 5175), 68, 70 (Taxnotes).
 Id. at 69.
 Id. at 70.
 2017 Wash. Legis. Serv. 3rd Sp. Sess. Ch. 28 (H.B. 2163), 7 (West).
 Id. at 12.
 Id. at 8.
 2017 R.I. Laws (17-H 5175), 68, 69 (Taxnotes).
 Id. at 69.
 Id. at 68.
 Id. at 65.
 Id. at 64-65.
 Id. at 66.
 Id. at 66.
 Id. at 65-66.
 2017 Me. Legis. Serv. Ch. 245 (S.P. 483) (L.D. 1405), 2 (West).