State and Local Tax Update

Before the new economic nexus threshold was affirmed in South Dakota v. Wayfair, states were looking for ways to get around the nexus restrictions of Quill v. North Dakota. Federal nexus restrictions prevented them from directly applying sales tax to out-of-state companies, but they could apply other reporting requirements and push use taxes. That is where we get “notice and report” laws.

When a vendor is not required to collect sales tax on an otherwise taxable transaction, the purchaser is supposed to pay use tax. However, the compliance with use tax requirements has been abysmal. Use taxes are easy to overlook and hard for states to track down.

Notice and report laws target these out-of-state companies which do not have nexus with the state and do not collect sales tax. The laws require companies to notify customers that use tax may be owed and how much their sales were each year. The companies are also required to provide a list of customers who will owe use tax to the state.

There are currently 11 states with notice and report laws: Alabama, Colorado, Kentucky, Louisiana, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and Washington.

Some of these states have no penalties for non-compliance with their notice and report law. Others have been superseded by economic nexus laws, but some have lower thresholds for the notice requirements than for economic nexus.

Kentucky’s notice and report requirement comes into effect at $100,000 in sales, but they have also passed an economic nexus law with a $100,000 threshold, which rendered the notice and report requirement redundant. If a company has enough sales to trigger the notice and report requirement, the economic nexus requirement means they need to be collecting sales tax, and they will not need to bother with notice and report.

In general, $100,000 in sales remains the key point to trigger sales tax requirements, but it is not the only threshold. Notice requirements kick in with $10,000 of sales in Oklahoma or Pennsylvania. Louisiana requirements start with $50,000 in sales.

It is a good idea to regularly check with our clients to make sure they are in compliance with all state and local laws, especially if they are operating in multiple states.

David Hoover, CPA

Greenfield, Indiana

California, Illinois, Indiana, Kentucky