As expected, Rhode Island enacted legislation effective July 1, 2019 that requires remote retailers, marketplace facilitators, and referrers to register with the Rhode Island Division of Taxation and collect and remit Rhode Island’s 7% sales and use tax. But one month into the beginning of compliance, landmines and critical unanswered questions litter the now-revised Remote Sellers, Referrers, and Marketplace Facilitators Act (the “Act”). The Act was made constitutionally possible by the U.S. Supreme Court’s 2018 landmark decision in South Dakota v. Wayfair, Inc., which dispensed of the long-standing bar against a state’s imposition of sales tax where the taxpayer had no physical presence in the state. The Act applies if a remote retailer, marketplace facilitator (such as Amazon), or referrer has annual sales to Rhode Island customers exceeding either $100,000 or 200 transactions.
If you are a remote retailer, marketplace facilitator, or referrer, here are three major landmines in the Act and how to avoid them or, at least, control the damage.
Landmine: minimum – no, maximum – actually, minimum is “correct” (maybe?)
The penalty for failure to comply with the Act has changed—twice, in fact. As originally enacted in 2017, a $10,000 minimum annual penalty (that’s right—minimum) could be assessed against remote retailers and others noncompliant with the Act for any reason. Then, in 2018, what was rationally understood as a drafting error in the Act was corrected: the $10,000 penalty was amended to be the maximum annual penalty. But while the current version of the Act was pending in the legislature, pleas to legislators went unanswered, fair gave way to draconian, and the penalty has now reverted to a $10,000 minimum annual penalty for any failure to comply with any of the requirements of the Act—with failures numbering in excess of 1,000 each coming with an additional $10 penalty. In tax law, generally, compliance failures due to mistake, reasonable cause, or even ordinary negligence are treated leniently, but apparently not in Rhode Island—one mistake can cost you $10,000! A $10,000 penalty would shutter many small businesses. (As the Act was intentionally changed, it could be inferred that Rhode Island doesn’t care about the bankruptcy of small business located out of state.) Perhaps rational minds will prevail, and the statute will once again revert to providing for a maximum annual penalty of $10,000. But don’t hold your breath—the legislature had a chance to amend the Act in the 2019-2020 Rhode Island fiscal year budget bill but declined.
Albeit perhaps somewhat patronizing, the obvious advice to avoid this landmine is not to make any compliance mistakes. But if this landmine blows up underneath you, a tax practitioner can assist you with available statutory and administrative penalty relief. It also couldn’t hurt to call Senator Conley, and Representative Abney, sponsors of the Act, and let them know how you feel about the $10,000 minimum penalty.
Landmine: compliance at the drop of a hat
The Retailer’s Act requires remote retailers, marketplace facilitators, and referrers who met the $100,000 or 200 transaction thresholds in the prior calendar year to register and collect the tax. But what about retailers, facilitators, and referrers who have not yet been collecting Rhode Island sales tax but trip the thresholds with year-end holiday sales? Those sellers will have mere days to register for a permit and begin collecting and remitting sales tax. Compliance at the drop of the hat is not possible. Systems and processes need to be in place. Don’t look to the Act for a grace period, though; just book a $10,000 contingent liability in expectation that you’ll be hit with the Act’s minimum penalty.
For those retailers, facilitators, and referrers who may approach the $100,000 and 200 transaction thresholds, seemingly the only way to avoid a January 1 mad scramble to comply with the Act is to carefully monitor the thresholds, at least in the last calendar quarter.
Landmine #3: uncertain compliance thresholds for marketplace facilitators and referrers
The Act is not clear how the $100,000 or 200 transaction thresholds apply to marketplace facilitators or to referrers. The $100,000 and 200 thresholds apply to gross revenue from sales of goods or certain services. Marketplace facilitators and referrers do not sell goods or services but merely provide the marketplace for sales or make referrals for sales. They do not, as a technical matter, sell or have revenue from those sales. So, what threshold applies? One possibility—which regulations could make clear—is that the thresholds are calculated on a marketplace facilitator’s or referrer’s fees charged to sellers with Rhode Island sales. Another option is that the thresholds for a marketplace facilitator or referrer are based on Rhode Island revenues of sellers in the marketplace or Rhode Island sales referred, although the Act 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 Act is that no threshold applies, and marketplace facilitators and referrers would need to collect Rhode Island sales tax even on the first dollar of Rhode Island sales by any of their sellers. Again, don’t hold your breath for the Rhode Island legislature’s clarification.
One option always available is to be as conservative as possible—just register, collect, and remit from dollar one. But if compliance with the Act is not required, compliance would be an unnecessary cost and burden. Even worse, mistaken compliance could result in litigation. One alternative is to seek informal guidance or a declaratory ruling from the Rhode Island Division of Taxation. A tax practitioner could be invaluable in assisting you with that process.