Retailers outside of Rhode Island may soon be forced to collect sales tax on sales to Rhode Island customers under twin bills introduced in the Rhode Island Senate and House of Representatives at the beginning of February. The legislation also targets marketplace facilitators, such as Amazon and Etsy, requiring them to collect sales tax on behalf of sellers on their platforms. A law in place since last August currently provides remote retailers with a choice to collect sales tax or comply with certain reporting requirements and requires marketplace facilitators to report whether or not they collected sales tax for all of their marketplace sellers. But the proposed legislation would force remote retailers to collect the tax and, for the first time in Rhode Island, require marketplace facilitators to collect the tax on behalf of their marketplace sellers.
Details and Questions
Under the bills, retailers without a physical presence in Rhode Island but having annual sales to Rhode Island customers in the prior calendar year equal to or exceeding either $100,000 or 200 transactions will be required to register with the Rhode Island Division of Taxation for a permit to make sales at retail and to collect and remit sales tax. The $100,000 or 200 transaction thresholds are also applied to marketplace facilitators. But the current bills are not clear how. One possibility is that the thresholds are calculated on a marketplace facilitator’s fees charged to sellers with Rhode Island sales. Another option is that the thresholds for a marketplace facilitator are based on revenues of sellers in the marketplace, although the legislation does not make clear whether the revenue would be on a seller-by-seller basis or in the aggregate. Still a third possibility left open by the legislation is that no threshold applies, and marketplace facilitators would need to collect Rhode Island sales tax even on the first dollar of Rhode Island sales by any of their sellers. Hopefully, future drafts of the bills will provide needed clarity to this key question and many other questions.
90-Day Window to Comply
While the new rules would be effective upon passage, those remote sellers and marketplace facilitators who have not been collecting Rhode Island sales tax under current law and who met the $100,000 or 200 transaction thresholds in the prior calendar year will have 90 days from passage to register and collect the tax. But for those remote sellers that have not crossed the thresholds in 2018, year-end sales could trip the thresholds, potentially leaving those sellers with mere days to register for a permit and begin collecting and remitting sales tax.
Origins of the Bills
These proposed Rhode Island bills have been made possible by the U.S. Supreme Court’s landmark decision last fall in South Dakota v. Wayfair, Inc. That case overruled the Court’s decades-old tax jurisprudence that had required a retailer to have a physical presence in a state before the state could impose its sales tax. The Court’s ruling in Wayfair allows states to impose sales tax based on the level of economic activity an out-of-state retailer derives from the state. South Dakota’s law, for instance, provides the same $100,000 and 200 transaction thresholds used in Rhode Island for requiring retailers to collect sales tax. While the Court did not expressly hold in Wayfair that South Dakota’s law passed constitutional muster, practically, states across the country have used South Dakota’s law as a guide, with many—including Rhode Island—mimicking the law’s $100,000 dollar or 200 transaction thresholds.
The bills implement Governor Gina Raimondo’s plan, set forth in her fiscal year 2020 budget, to “modernize” and close a “loophole” in the sales tax. The budget estimates that these changes will increase sales tax collections by $22.4 million. The bills also enjoy the sponsorships of both the Senate and House finance chairs. The legislation is part of a rapidly growing trend among the states after Wayfair to parody South Dakota’s legislation. Costing relatively little in political capital and providing a significant revenue boost to the budget, the bills would seem destined for the governor’s desk and enactment.