Sales Tax Slice: Buyer Beware—Online Bargain Buys May Trigger Use Tax Liability


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Cyber Monday 2017 made history. Although, Cyber Monday has been king of shopping holidays since 2010, according to TheStreet, the more noteworthy aspect of this year’s most popular shopping day was the record-breaking amount of revenue derived from purchases made on mobile devices and smartphones, according to Adobe Analytics Data. Online shopping is now easier than it ever was, but some may be surprised to discover that purchasers who enjoy this luxury are responsible for remitting use tax[1] to their state departments of revenue if sales tax is not collected by the seller at the time of the sale. This is often the case with retail transactions that occur online given the constitutional limitations on a state’s ability to require out-of-state retailers to collect and remit tax if the seller does not have physical presence (subscription required) in that state. So, in response to the difficulty of policing individuals’ use-tax liability, some states have enacted laws requiring sellers to notify purchasers of their obligation to pay this tax. Others also require sellers to report the taxable transactions to the Department of Revenue.

Colorado, for example, took steps to impose notice and reporting requirements in 2010, via statute, and a lengthy court battle ensued. However, the state was successful in its efforts to impose these requirements. In Direct Marketing Association v. Brohl (“DMA”),[2] the United States Court of Appeals for the Tenth Circuit, ruled that the law was neither unconstitutional nor confined by Quill Corp. v. North Dakota, which prevents retailers from being required to collect and remit sales tax to a state where the retailer does not have some form of physical presence. The Supreme Court subsequently denied certiorari[3] on Dec. 12, 2016, and in July 2017, the State began enforcing its reporting and notification requirements.

As consumer shopping behavior continues to shift in favor of e-commerce over brick-and-mortar retail, both shoppers and e-retailers (who do not have physical presence in the state where the sale is made) should be aware of the consequences they may face if use tax goes unreported or unpaid. In Colorado, use tax is imposed at a rate of 2.9 percent on the storage or acquisition charges or costs incurred by a customer for the privilege of storing, using, or consuming articles of tangible personal property purchased at retail. Whether notice is given by a retailer or otherwise, purchasers must report[4] their tax obligation on their 2017 income tax returns which are in by April. Failure to pay the tax may result in the imposition of penalties and interest.

For out-of-state retailers[5] making sales within Colorado, notice and reporting obligations take effect when the gross sales in the state total $100,000 or more in a calendar year. If this threshold is met, there are a series of steps that the seller must take to comply with the state’s law. First, the seller must notify the purchaser of the filing in payment obligation at the time of purchase. If this notice is not provided, a $5 penalty is imposed on the retailer for each instance. Next, by Jan. 31 of each year, Colorado customers must be provided with an annual purchase summary informing them of purchases they made from the retailer in the prior year and the use tax that is owed as a result of the purchases (unless consumers’ total purchases are less than $500 in which case this does not apply). Lastly, by March 1, the retailer must prepare an annual report of sales made to the Colorado customers during the prior year and file that report with the state’s Department of Revenue. There is an exception to this filing requirement if a retailer is not required to submit any annual purchase summaries for purchasers who spent less than $500, but one purchase exceeding the $500 threshold will require the retailer to report all purchases of Colorado residents including those below the threshold. Failing to file the report could cost a retailer $10 for every purchaser that was improperly omitted from the report. Vermont and Louisiana also have notice and reporting requirements effective July 2017 that are fairly similar to Colorado’s. Oklahoma, on the other hand, has notice requirements for retailers whose sales into Oklahoma exceed $100,000 in the previous calendar year.

Notice and reporting may not be a perfect solution for states limited by physical presence requirements to find out how much use tax is owed to them, but these provisions could potentially be a good first step. That being said, if e-commerce continues to grow at light speed, states may find that the benefits associated with notice and reporting requirement are outweighed by the administrative burdens of chasing down outstanding use tax obligations.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Did your Cyber Monday purchases involve collection of sales tax?

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[1] Use tax is imposed on the privilege of ownership, possession, use, storage or consumption of tangible personal property or taxable services.

[2] Brohl v. Direct Marketing Assn., No. 16-458, (U.S., cross-petition for cert. filed Oct. 3, 2016) Direct Marketing Assn. v. Brohlcert. denied (U.S. Aug. 29, 2016) (No. 16-267); Brohl v. Direct Marketing Assn.cert. denied (U.S. Oct. 3, 2016) (No. 16-458).

[3] On December 12, 2016, the U.S. Supreme Court denied the DMA's petition for certiorari and the Colorado Department of Revenue's cross-petition for certiorari.

[4] This is true for most states that impose use tax.

[5] All corporations included in a controlled group of corporations pursuant to 26 U.S. Code § 1563 are considered a single non-collecting retailer.