State Use Tax Notice and Reporting Requirements – A Growing (and Troubling) Trend
In an effort to increase their revenue from sales and use taxes, a growing number of states have enacted or are considering legislation that requires unregistered, non-collecting vendors to inform their in-state customers that their purchases are subject to that state’s sales and use tax, and in some instances, to report their customers’ names and purchase information to the state. These reporting requirements are an effort by the states to reduce the revenue being lost due to non-compliance with their use tax reporting requirements. Due to the complexity and potential costs associated with some of the states’ notice and reporting requirements, they are also a means to compel non-collecting retailers to register and begin collecting the state’s sales and use tax.
Outlined below are the general reporting requirements for several states that have enacted legislation:
Colorado became the first state to create use tax notice and reporting requirements for out of state sellers when its legislation was enacted in 2010. The law was immediately challenged by the Direct Marketing Association, and the parties entered into a settlement agreement in February 2017. In the interim period, the Colorado Department of Revenue was prevented from implementing its law by state and federal injunctions.
Effective July 1, 2017, Colorado began requiring non-collecting out-of-state vendors with gross receipts in excess of $100,000 during the previous calendar year to inform Colorado customers at the time of sale that their purchases may be subject to use tax. “Transactional Notices” must be provided with every Colorado “reportable purchase” (tangible property shipped to a Colorado address, or electronically delivered property determined by the seller to be used in the state) that is not exempt from the state’s sales and use tax. The notices must be specifically located at checkout (online purchases) or on order forms, and indicate that the retailer does not collect Colorado sales or use tax, the purchase is not exempt from the state’s sales or use tax merely because it is made over the Internet or other remote means, and that the state requires purchasers to file a sales or use tax return reporting all taxable purchases and for which no tax was collected by the retailer and pay the tax on those purchases.
If a customer had $500 or more of purchases, the vendor must additionally provide the customer with an “Annual Purchase Summary” outlining purchase dates and amounts. These notices must be provided to customers by January 31 of the following year.
Any non-collecting retailer who is required to provide at least one Annual Purchase Summary to a Colorado purchaser must also provide to the state an Annual Customer Information Report which includes the names, addresses, and total purchases of their Colorado customers, including those to whom no Annual Purchase Summary was required to be provided. This report must be submitted by March 1 of the following year – the first report being due on March 1, 2018.
Louisiana enacted legislation similar to Colorado’s effective July 1, 2017. Out-of-state vendors with more than $50,000 of Louisiana sales must provide the purchasers a notice at the time of sale that their purchase is subject to use tax, and must provide annual notifications to its customers by January 31 of the following year.
By March 1 of the following year, the out-of-state vendor must file an annual statement with the state that includes the total amount paid by each customer.
Effective August of 2017, use tax reporting requirements were enacted and apply to out-of-state retailers if, in the preceding calendar year, the vendor had $100,000 or more in gross revenue from the sale of taxable goods/services delivered in Rhode Island or 200 or more transactions of goods/services delivered in Rhode Island.
If either threshold is met, non-registered, non-collecting vendors must do all of the following:
- Post on their website that purchases may be subject to Rhode Island use tax
- Notify the customer at the time of purchase that their purchase may be subject to the state’s use tax
- Send customers with $100 or more in purchases an annual summary of their purchases by January 31 of the following year and
- Provide to the State by February 15 a completed Annual Attestation form stating all notice requirements were fulfilled.
Effective July 1, 2017, Vermont, like other states, began requiring non-collecting out-of-state vendors to notify Vermont purchasers that use tax is due.
Additionally, by January 31 of the following year, the vendor must provide to Vermont customers with $500 or more in purchases a notice that shows the total amount of purchases for the year that is subject to the state’s use tax.
Beginning January 1, 2018, Washington has a new use tax notice and reporting requirement for out-of-state sellers making $10,000 or more in retail sales to Washington customers who choose not to register and collect the state’s retail sales tax.
Under these requirements, remote sellers must:
- Notify their Washington customers of their use tax reporting obligations on their website, catalogs, and other media, as well as at the time of each sale. The annual penalty for failure to comply with this notification requirement is $20,000.
- By February 28 of the following year, provide to customers information about purchases made during the prior year that may be subject to use tax. Failure to comply with this reporting requirement can result in a minimum penalty of $5,000, which increases based on gross receipts.
- By February 28, provide to the Department of Revenue an annual report with names, addresses, and total sales to Washington customers. The penalty for failure to provide the State the annual report can result in a penalty of $25 per customer not included in the report, with a minimum penalty of $20,000.
All of the states impose penalties for failure to comply with their notice and reporting requirements, but Washington stands alone in the severity of its penalties.
If your business sells taxable products or services into these states, you should review your sales activity to determine if a reporting requirement exists.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.