Voluntary collection discounts are compensation from a state to sellers that collect and remit sales taxes on behalf of that state. The discounts are meant, in part, to compensate sellers for the administrative expenses incurred in collecting and remitting sales taxes. These discounts are also a method to encourage sellers to collect and remit sales taxes on sales into states where they have no physical presence, because, until recently, states were barred from compelling them to do so.
On June 21, 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc., overruling the physical presence standard that previously limited states’ ability to require retailers without a physical presence in a state to collect and remit sales taxes. Now that Wayfair has presented the possibility of imposing tax collection requirements even on out-of-state sellers without a physical presence, states may be rethinking the monetary allowances they grant to remote sellers. This means that retailers that receive voluntary collection discounts for collecting sales and use taxes in states in which they do not have a physical presence may now lose this benefit.
Utah, specifically, enacted S.B. 2001 on July 21, 2018, ending its collection incentives program for remote sellers, effective Jan. 1, 2019. Prior to Jan. 1, 2019, Utah allows remote sellers without nexus in Utah who voluntarily collect and remit sales and use taxes to retain 18 percent of any amounts the seller would otherwise remit. Before Utah enacted this new law, its remote seller vendor discount program was scheduled to expire if Congress or the U.S. Supreme Court took action that would require such sellers to collect and remit Utah sales taxes. Perhaps in passing this legislation, the state sought to clarify whether its vendor collection discount would continue in light of the Wayfair decision.
Tennessee also currently offers a vendor collection discount to out-of-state individuals or businesses that make sales in Tennessee who cannot otherwise be required to register for sales and use tax under applicable law. Tennessee has yet to issue guidance for remote sellers regarding registration requirements or how the vendor collection discount will be administered post-Wayfair. Many other states, like Texas, Virginia, and Colorado, also offer vendor collection discounts, but do so for all sellers whether or not they have nexus in a given state. It is still unclear whether these states will continue to do so after the Wayfair decision.
The Streamlined Sales and Use Tax Agreement, while not granting a voluntary collection discount to remote sellers, provides that member states will pay for CSP software and services for any seller in those member states for which the seller meets the definition of a “volunteer seller.” The definition of volunteer seller includes sellers that registered for sales and use tax collections in a state where they “did not have a requirement to register … at the time of registration” along with sellers that meet certain criteria involving having minimal physical presence in a state. What voluntary seller means now that states are broadening their nexus rules in response to the Wayfair decision is an open question. The Streamlined Sales and Use Tax Governing Board has held emergency meetings to discuss Wayfair and its implications for remote sellers, but so far it has stated only that it is “continuing to review the decision and its implications.”
With all the anticipated changes in nexus standards, only time will tell if these discounts and benefits for sellers will join dinosaurs, dodos, and disco in extinction.
Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Should states offer vendor collection discounts to remote sellers?
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