State of Wayfair: New Jersey Prepares to Reap Revenue Harvest

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Michael J. Bologna

New Jersey is hoping to harvest up to $350 million in new sales tax revenue annually from online vendors and marketplace facilitators under a new law signed by Gov. Phil Murphy (D) Oct. 4.

Responding to revenue opportunities under the groundbreaking South Dakota v.Wayfair ruling, Murphy signed A-4496, a provision of the Sales and Use Tax Act. The new law specifies that out-of-state online vendors that make 200 or more separate transactions in a calendar year or have sales in excess of $100,000 in the Garden State will need to remit the state’s 6.625 percent sales tax.

The changes could yield between $216 million and $351 million in new sales tax revenue for the state, the bill’s sponsors say.

New Jersey’s approach reflects the legal standards established by the U.S. Supreme Court in the June 21 Wayfair ruling.

Wayfair tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales. The ruling has many states looking to expand their authority over online sales taxation. The majority in the 5-4 ruling suggested strongly South Dakota’s law requiring remote sellers to collect sales tax if they had more than $100,000 in in-state sales or 200 transactions would pass constitutional muster.

New Jersey’s law also imposes new duties on marketplace providers such as Amazon.com Inc., Etsy Inc., and eBay Inc., which handle marketing, payment processing, and delivery for third-party sellers. Such facilitators will need to collect tax on behalf of sellers making sales into New Jersey via their platforms.

Rules for Online Travel

The law also clarifies that online travel agencies, unlike other online vendors, won’t be required to collect or pay sales or hotel taxes on their New Jersey sales.

The law will take effect Nov. 1, although the state tax director is given discretion to suspend or delay collection by up to 180 days to ensure accurate implementation of the new rules.

Assemblyman John Burzichelli (D), who sponsored the measure, said the new law would create “parity among brick-and-mortar businesses and online marketplaces and provide the state with needed revenue.”

Burzichelli said online marketplaces have made interstate commerce easier, but the platforms have also permitted “many businesses to circumvent state sales tax requirements.”

So What About Vendor Contracts?

Investment and asset managers are closely reviewing vendor contracts to evaluate the taxability of their purchases in the wake of the Supreme Court’s Wayfair ruling, a tax attorney said.

“We are seeing a great deal more emphasis in some of these vendor contracts around the sales taxability of some of these purchases,” Sam Megally, a state and local tax partner at K&L Gates LLP in Dallas, said Oct. 5 at the American Bar Association tax section meeting in Atlanta.

Investment managers are taking a harder look at their deals as the purchase of a single processing or information service could be enough to trigger nexus and a collection obligation for that vendor, Megally said. “This will be an increasing issue as we go forward.”

Economic nexus laws or rules are now in effect in 18 states, and collection requirements in another 15 are coming.

States are taking a variety of approaches on the taxation of services, and more states are considering expanding their sales tax base to services, said Nikki E. Dobay, senior tax counsel of the Council On State Taxation in Portland, Ore.

Making It Solid in Colorado

Meanwhile, the Colorado Department of Revenue Taxation Division has set aside Oct. 30 for a public rulemaking hearing to make permanent regulations governing the collection and remittance of taxes on sales into the state by remote vendors. The division adopted the rules on an emergency basis Sept. 11.

The rules would apply prospectively and will take effect Dec. 1. They also embrace South Dakota-style economic nexus thresholds of $100,000 in annual sales or 200 annual transactions as the trigger for when an out-of-state retailer must collect and remit taxes on sales into Colorado. That means the Centennial State hits two of the three major criteria spelled out in the guidance in the Wayfair decision for when a state can use economic nexus to assert its authority to compel remote sales tax collection.

Tax practitioners say Colorado is a long way from having the third—a simplified tax system making it relatively easy for out-of-state business to remit taxes. Colorado is not a member of the Streamlined Sales and Use Tax Agreement, and with 756 taxing jurisdictions—some of them with constitutional home rule authority—the state’s overall tax system is far from simple, observers say.

The rules will be available at this link on the Colorado secretary of state’s website Oct 10.

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