economic nexus

Vermont has an economic nexus law on the books, but the earliest it could take effect is July 1, 2017.

Amazon started to voluntarily collect and remit Vermont tax beginning February 1, 2017. That’s good news for state coffers; it’s expected to bring in approximately $5 million annually. But it doesn’t change the fact that many out-of-state vendors aren’t required to collect tax on Vermont sales.

To address that, Vermont enacted an economic nexus law in May 2016. It has a delayed effective date. Under it, out-of-state vendors with economic nexus are required to collect and remit Vermont sales and use tax on “the later of July 1, 2017 or beginning on the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement of Quill v. North Dakota, 504 U.S. 298 (1992).”

What is Quill?

A state cannot require a business to collect and remit sales and use tax unless that business has nexus with the state, a connection that is generally defined as a substantial physical presence (e.g., employees, an office, a warehouse). This physical presence precedent was established by and has been upheld by the Supreme Court of the United States in Quill.

North Dakota argued that the Quill Corporation’s catalog and phone sales were substantial enough in North Dakota for the business to establish nexus — a tax obligation — with the state. The court disagreed, but it also acknowledged that the taxation of interstate sales was an issue that Congress “may be better qualified to decide.” Since that time, numerous bills dealing with states’ right to tax certain remote sales have been introduced to Congress; the most successful to date was the Marketplace Fairness Act of 2013, which was approved by the Senate and then shelved by the House Judiciary Committee.

Affiliate and click-through nexus

Lacking federal action or further guidance from the Supreme Court or Congress, the decision in Quill stands. To work around its constrictions, numerous states have created affiliate and click-through nexus laws. In the former, nexus is established through an out-of-state vendor’s ties to in-state affiliates; in the latter, it is created when referrals (i.e., links) on websites owned by state residents generate a certain amount of sales for an out-of-state vendor.

In states where these policies exist, they establish nexus for many out-of-state sellers. However, they lack teeth. Out-of-state businesses can sidestep these laws by terminating relationships with residents, as Amazon once did in Arkansas, Louisiana, Vermont, and several other states. Residents of Maine are still unable to participate in Amazon’s Associates Program, although that will likely change once Amazon begins collecting Maine tax on April 1, 2017.

Enter economic nexus.

What is economic nexus?

Economic nexus laws base nexus on a company’s economic ties to a state, such as making a certain amount of sales transactions or gross sales in a state. In addition, economic nexus policies often include language explaining the economic need for the law. For example, South Dakota’s law states that the state’s inability to collect tax from remote vendors is “seriously eroding the sales tax base of this state,” and that the state’s reliance on sales tax revenue makes taxing remote transactions essential.

State lawmakers often, though not always, create their economic nexus laws to directly challenge the physical precedent upheld in Quill. This is the case in South Dakota, where officials were recently pleased to learn that their remote seller compliance law was ruled unconstitutional; it brings the legal battle one step closer to the Supreme Court.

Economic nexus in Vermont

Vermont House Bill 873 (Act No. 134) expands the definition of “vendor” to include certain out-of-state vendors that don’t have a physical presence in Vermont. A remote vendor is required to collect and remit sales tax when it engages in “regular, systematic, or seasonal solicitation of sales of TPP in Vermont,” and one of the following conditions is met:

  • The vendor has made sales of at least $100,000 from outside Vermont to destinations within Vermont
  • The vendor has made at least 200 individual sales transactions to destinations in Vermont during a preceding 12-month period

The Act considers the “regular, systematic, or seasonal solicitation of sales” of tangible personal property (TPP) to be:

  • The display of advertisements in Vermont;
  • The distribution of catalogues, periodicals, advertising flyers, or other advertising by means of print, radio, or television media; or
  • The use of mail, internet, telephone, computer database, cable, optic, cellular, or other communication systems, for the purpose of effecting sales of TPP.

Effective date hinges on Quill’s repeal or enactment of federal legislation

The effective date of Vermont’s economic nexus policy hinges on the repeal of Quill or the abrogation of the physical presence requirement by Congress.

Should Quill be repealed occur prior to July 1, 2017, which is unlikely at this point, Vermont economic nexus would likely take effect on July 1, 2017. Otherwise, it would likely take effect on the first day of the first quarter occurring after Quill’s repeal.

Should federal lawmakers grant states the authority to tax remote transactions, the same time frame would apply. There are currently three bills circulating in Congress that could grant states such authority: the Marketplace Fairness Act of 2015, the Remote Transactions Parity Act, and the Online Sales Simplification Act, which exists in draft form only. The enactment of any of these measures could pave the way for Vermont’s economic nexus law to take effect. Alternatively, the enactment of the No Regulation Without Representation Act of 2016 would codify the physical presence requirement upheld in Quill.

And if Quill stands and Congress doesn’t act? Vermont’s economic policy will not take effect — at least not as written under Act 134.

There is no telling what the future will bring for Quill, Congress, or state attempts to tax remote sales. If a challenge to Quill does end up before the Supreme Court, the court may or may not agree to hear it. As for Congress, there are reports that a marketplace fairness bill would meet approval in the full House; but any such bill must first be passed out of the House Judiciary Committee, which has been reluctant to act.

It seems likely that many states will continue with their efforts to acquire more remote sales tax revenue. Numerous pieces of remote sales tax legislation have been introduced since the start of the year in Hawaii, Indiana, Maryland, Pennsylvania, Washington, and several other states.

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