Oct. 3, 2018 – The Wisconsin Department of Revenue (DOR) has issued an emergency rule, effective Oct. 1, 2018, requiring out-of-state internet retailers to collect and remit Wisconsin sales taxes if annual sales or transactions exceed a certain threshold amount.
The emergency rule follows a recent U.S. Supreme Court decision, in South Dakota v. Wayfair, 138 S.Ct. 2080 (2018), in which the Court overruled previous decisions that said a state could not require an out-of-state seller to collect and remit state sales taxes on goods shipped to consumers unless the seller had a physical presence in that state.
That is, without a physical presence in the state, there was insufficient nexus with the state to require an out-of-state seller to collect and remit sales taxes. That has now changed, and businesses that sell goods online will likely need compliance help.
Before Wayfair, out-of-state sellers could not be forced to collect and remit sales taxes without a physical presence in the state. It was the responsibility of consumers in the receiving state to pay a use tax at the same rate as the sales tax in that state.
com rlatta staffordlaw Richard Latta, U.W. 1986, is a partner at Stafford Rosenbaum LLP, Madison. Tax law, corporate and partnership mergers, acquisitions, and reorganizations are among Mr. Latta’s practice areas. Reach him by phone at (608) 259-2648 or by com rlatta staffordlaw email.
As the Wayfair Court noted, however, “consumer compliance rates are notoriously low.” South Dakota estimated that the state lost between $48 and $58 million annually in uncollected use taxes that were not collected as sales taxes from businesses.
Now, states can force online retailers to collect the sales taxes at the point of sale, rather than relying on consumers to pay use taxes later through tax returns.
In Wayfair, the U.S. Supreme Court upheld a South Dakota law requiring sales tax collection and remittance by out-of-state sellers that annually deliver $100,000 of goods or services into the state or engage in 200 or more transactions for the delivery of goods and services. The Court said those amounts create sufficient nexus with the state.
Wisconsin’s emergency rule follows the Wayfair threshold for nexus. Under the DOR’s emergency rule, if an out-of-state retailer’s annual gross sales into Wisconsin exceeds $100,000 in the “previous year,” or if the retailer’s annual number of separate sales transactions into Wisconsin is 200 or more in the previous year, the retailer is required to register and collect Wisconsin sales or use tax for the entire current year.
An example in the emergency rule describes an out-of-state retailer that has more than $100,000 in gross sales in 2018 and so for the entirety of 2019, the retailer is required to collect and remit Wisconsin sales or use taxes.
Franchise and Income Tax
The DOR’s emergency rule expressly notes that internet sellers with substantial nexus for sales and use tax applying the Wayfair thresholds may also have substantial nexus for imposing Wisconsin franchise and income tax.
While not stated in the emergency rule, a 1959 federal law provides that a state is not permitted to impose a tax measured by net income on an out-of-state company if orders for tangible personal property are solicited in the state and then accepted or rejected, and filled, from outside the state. That law continues to limit Wisconsin’s ability to assert substantial nexus for franchise or income tax purposes regarding sales of tangible personal property.
Similar to Wayfair, in the emergency rule Wisconsin adopted, a small out-of-state retailer rule provides that retailers who have sales that do not exceed $100,000 (inclusive of both taxable sales and sales exempt from tax) and annual transactions of fewer than 200 are not required to collect and remit sales taxes to Wisconsin.
For purposes of what “year” a retailer uses when determining whether the $100,000 of sales and 200 transactions thresholds are exceeded, it is the retailer’s taxable year for federal income tax purposes.
After issuing the emergency rule, the DOR answered a question left open by the emergency rule, which is if an out-of-state retailer had more than $100,000 of sales for 2017, or 200 or more transactions in 2017, is the out-of-state retailer required to collect and remit Wisconsin sales or use taxes for sales beginning Oct. 1, 2018?
That is, when the emergency rule refers to “previous year” do 2017 sales count for determining the obligation to collect and remit taxes beginning on Oct. 1, 2018?
DOR takes the position, on its website, that if an out-of-state retailer exceeds either the $100,000 in sales or 200 transactions thresholds in 2017, then the retailer needs to register and collect Wisconsin sales taxes beginning on Oct. 1, 2018.
Similarly, if from Jan. 1, 2018, to Sep. 30, 2018, an out-of-state retailer exceeds either the $100,000 in sales or 200 transactions thresholds, then the retailer needs to register and collect Wisconsin sales taxes beginning Oct. 1, 2018.
If an out-of-state retailer’s annual gross sales into Wisconsin are $100,000 or less in the previous year, and separate sales transactions into Wisconsin are fewer than 200 in the previous year, then the retailer is not required to collect and remit taxes until its sales or transactions exceed the $100,000 or 200 transactions thresholds for the current year.
Once those thresholds are exceeded, a retailer is required to collect and remit taxes for the remainder of the year. Once a retailer has exceeded the $100,000 of sales or the 200 or more transactions thresholds, then the obligation to collect and remit sales and use tax begins with the retailer’s next sale transaction, the rule explains via example.
Wisconsin is one of the 24 states that have adopted the Streamlined Sales and Use Tax Agreement (SSUTA) and is a “full member” of the Streamlined Sales Tax Governing Board. Thus, registration and reporting software to implement these new requirements are available through the Streamlined Sales Tax Governing Board’s website.
Based on conversations with DOR personnel, through the use of the Streamlined Sales Tax Governing Board processes, SSUTA, and certified software providers listed on the Streamlined Sales Tax Governing Board’s website, the emergency rule will have negligible implementation costs to the private sector.
While Wisconsin has now clarified that internet sellers exceeding the $100,000 in sales and 200 transactions thresholds of Wayfair are required to collect and remit Wisconsin sales tax, it is yet unclear whether Wisconsin will seek to expand what constitutes “substantial nexus” for sales/use taxes and franchise/income taxes.
Based on tax audit experiences of the author, it will not be surprising if the DOR seeks to expand substantial nexus by looking at economic nexus, click-thru nexus, “cookie” nexus, and notice requirements to broaden the base of Wisconsin taxpayers.
The DOR already has audit office presence in states outside of Wisconsin to facilitate audits to expand the number of businesses subject to Wisconsin tax.
The DOR has a voluntary disclosure program (VDP), as to which Wisconsin’s policy is to collect four years’ taxes where a VDP has been implemented if a VDP is entered into by a taxpayer. Businesses that are on the cusp of meeting substantial nexus in Wisconsin may want to consider availing themselves of the VDP process.
Comments on the emergency rule may be submitted to the DOR no later than a “to be announced” date for a public hearing regarding the emergency rule. The place, date, and time of the public hearing will be published in the Wisconsin Administrative Register.
The emergency rule announced by the DOR leaves internet sellers with little time to implement collection and remitting processes to comply with the new rule.
While the emergency rule assists in harmonizing Wisconsin’s sales and use tax nexus thresholds with other states that adopt the Wayfair thresholds for substantial nexus, the timeline for implementation of the emergency rule places a significant decision burden on businesses (e.g., start collecting sales tax in Wisconsin on Oct. 1, 2018) and may place a procedural burden on internet sellers. Lawyers can help sellers in the rush to comply.