State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Vermont Legislation Enacts Prospective Notice Requirements on Noncollecting Vendors and Potential Expansion of Remote Seller Nexus On May 25, 2016, Vermont enacted legislation containing provisions for imposing sales and use tax notice requirements on noncollecting vendors, and expanding remote seller sales and use tax nexus provisions to vendors with a threshold level of sales or transactions within the state. 1 The legislation contains unique implementation dates that are triggered, in part, by the date that Colorado s sales and use tax reporting requirements are implemented and the date that the Quill 2 decision is overturned by a controlling court or federal legislation. In addition to the notice requirements, the legislation also updates the state s conformity to the Internal Revenue Code (IRC) and revises provisions governing the state s fuel gross receipts tax and filing due dates. Sales Tax Notice Requirements for Noncollecting Vendors Effective on the earlier of: (i) July 1, 2017; or (ii) the first day of the first quarter after the sales and use tax reporting requirements currently being challenged in the DMA 3 litigation are implemented by Colorado, 4 a noncollecting vendor making sales into Vermont must notify its Vermont purchasers that sales or use tax is due on all nonexempt purchases made from the vendor. 5 Furthermore, purchasers must also be notified that the state requires them to pay the tax due on their tax returns. 6 A noncollecting vendor is defined as a vendor that sells tangible personal property or services to purchasers who are not exempt from sales tax, but do not collect Vermont sales tax. 7 The legislation imposes a $5 Release date June 9, 2016 States Vermont Issue/Topic Multiple Taxes Contact details Rob Michaelis T E rob.michaelis@us.gt.com Michael Cronin T E michael.cronin@us.gt.com Patrick Drennen T E patrick.drennen@us.gt.com Adam DoVale T E adam.dovale@us.gt.com Jamie C. Yesnowitz Washington, DC T E jamie.yesnowitz@us.gt.com Lori Stolly Cincinnati T E lori.stolly@us.gt.com Priya D. Nair Washington, DC T E priya.nair@us.gt.com 1 Act 134 (H. 873), Laws Quill v. North Dakota, 504 U.S. 298 (1992). 3 Direct Marketing Association v. Brohl, U.S. Court of Appeals, 10th Circuit, No , Feb. 22, For a discussion of this case, see GT SALT Alert: Federal Court of Appeals Upholds Colorado s Sales and Use Tax Notice and Reporting Requirements. 4 H. 873, 41(4). 5 VT. STAT. ANN. tit. 32, 9712(a). 6 Id. 7 VT. STAT. ANN. tit. 32, 9701(54)..

2 Grant Thornton LLP - 2 penalty for each failure to provide notice, unless the noncollecting vendor can show reasonable cause for such failure. 8 An additional notice is required for each Vermont purchaser who has made $500 or more in purchases from the noncollecting vendor in the previous calendar year. 9 On or before January 31 of each year, the noncollecting vendor is required to send a notification to these purchasers showing the total amount paid for their Vermont purchases from the noncollecting vendor in the previous calendar year. 10 The notification must state that Vermont requires a sales or use tax return to be filed and sales or use tax paid on nonexempt purchases made by the purchaser from the noncollecting vendor. 11 The notification must be sent by first-class mail or electronic mail and may not be included with any other shipments. 12 Also, the notification must include the words Important Tax Document Enclosed on the exterior of the mailing and must include the name of the noncollecting vendor. 13 A penalty of $10 will be imposed for each failure to provide such notice unless the noncollecting vendor shows reasonable cause for the failure. 14 Remote Seller Nexus Provisions The legislation also revises the definition of vendor under Vt. Stat. Ann. tit. 32, Sec. 9701(9)(F) to mean a person making sales of tangible personal property from outside Vermont to a destination in Vermont and not maintaining a place of business or other physical presence in Vermont that engages in regular, systematic, or seasonal solicitation of sales of tangible personal property in Vermont 15 and has either made sales from outside Vermont to destinations in the state of at least $100,000, or totaling at least 200 individual sales transactions, during any 12-month period preceding the monthly period for which the liability for tax is determined. 16 Current law governing remote seller nexus contains a lower threshold for the amount of sales ($50,000) and does not contain a quantitative threshold for number of transactions. The revisions to the definition of vendor take effect on the later of: (i) July 1, 2017; or (ii) the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement contained in the U.S. Supreme Court s decision in Quill v. North Dakota VT. STAT. ANN. tit. 32, 9712(a). 9 VT. STAT. ANN. tit. 32, 9712(b). 10 Id. 11 Id. 12 Id. 13 Id. 14 Id. 15 Enumerated as: (i) the display of advertisements in Vermont; (ii) the distribution of catalogues, periodicals, advertising flyers, or other advertising by means of print, radio, or television media; or (iii) by mail, Internet, telephone, computer database, cable, optic, cellular, or other communication systems, for the purpose of effecting sales of tangible personal property. 16 VT. STAT. ANN. tit. 32, 9701(9)(F) U.S. 298 (1992).

3 Grant Thornton LLP - 3 Sales and Use Tax on Contractors Effective July 1, 2016, manufacturers or retailers purchasing material and supplies for use by them in erecting structures or for improving, altering, or repairing real property can make an election to be treated as a retailer on those purchases and not have such purchases be considered a retail sale. 18 A manufacturer or retailer making the election is able to charge sales tax to its customers on its materials and supplies or (in the case of a manufacturer) on the finished goods. 19 Those making the election must use the raw materials, supplies, or finished manufactured products in erecting structures or otherwise improving, altering, or repairing real property. The sales price for purposes of calculating tax on materials, supplies, or finished manufactured products cannot be less than the manufacturer s or retailer s best customer price. The tax must be separately stated on any invoice or receipt. 20 If this election is not made, the manufacturer or retailer will be treated as a contractor. 21 The election is binding for a minimum of five years and continues in effect until a withdrawal of election is filed by the manufacturer or retailer. 22 Income Tax IRC Conformity The legislation updates Vermont s conformity to the IRC in effect for taxable year The updated conformity provision takes effect retroactively to January 1, 2015 and applies to taxable years beginning on and after January 1, Returns and Payment of Withheld Taxes Under current law, persons required to deduct and withhold amounts under Vt. Stat. Ann. tit. 32, Sec must file returns and make payments quarterly if the person reasonably estimates that the amounts deducted and withheld during that quarter will not exceed $25, Effective July 1, 2016, 26 the legislation removes this threshold, so that state quarterly payments will be mandated for persons required to make quarterly or annual payments of federal withholding under the IRC. 27 Additionally, under existing law, persons required to deduct and withhold amounts under Vt. Stat. Ann. tit. 32, Sec must file an annual return no later than February 28 of 18 VT. STAT. ANN. tit. 32, 9711(b). 19 VT. STAT. ANN. tit. 32, 9711(c). 20 Id. 21 VT. STAT. ANN. tit. 32, 9701(5). 22 VT. STAT. ANN. tit. 32, 9711(d). 23 VT. STAT. ANN. tit. 32, H. 873, 41(1). 25 VT. STAT. ANN. tit. 32, H. 873, 41(2). 27 VT. STAT. ANN. tit. 32, 5842(a)(1).

4 Grant Thornton LLP - 4 each year. 28 Effective July 1, 2016, 29 the due date for filing of the annual return is changed to on or before January 31 of each year. 30 S Corporations Effective May 25, 2016, 31 the payment of the S corporation minimum tax must be made on or before the due date for filing S corporation returns under IRC Sec. 6072(b). 32 Prior law required an S corporation to pay the minimum tax on or before the filing due date for C corporation returns under Vt. Stat. Ann. tit. 32, Sec Additionally, effective May 25, 2016, Vt. Stat. Ann. tit. 32, Sec. 5912, which deals with the characterization of S corporation income, is repealed. 33 Fuel Tax The legislation converts the fuel gross receipts tax under Vt. Stat. Ann. tit. 33, Sec into a fuel tax based on volume of sales and revises the sunset date of the tax from June 30, 2016 to June 30, Under current law, Vermont imposes a flat 0.5 percent tax on the retail sale of certain types of fuel. Effective July 1, 2016, 34 Vermont will impose a three-tier fuel tax at the following rates: (1) $0.02 per gallon on the retail sale of heating oil, propane, kerosene, and other dyed diesel fuel delivered to a residence or business; (2) 0.75 percent gross receipts tax on the retail sale of natural gas and coal; and (3) 0.5 percent gross receipts tax on the retail sale of electricity. 35 Fuel sellers may itemize the tax on the invoice or bill. If they elect to do so, they must include a statement that the tax is for support of Vermont s Low Income Home Weatherization Program. 36 This provision takes effect January 1, Additionally, for the first year that itemization is permitted, fuel dealers that itemize must also include a statement indicating that [i]n 2016, the fuel gross receipts tax, in place since 1990, was converted from a tax based on the price of fuel to a tax based on the volume of fuel sales in order to provide a more stable funding source for low-income weatherization programs. 38 The legislation also directs the Joint Fiscal Office to conduct an analysis of the administrative costs associated with Vermont s seasonal and crisis fuel and 28 VT. STAT. ANN. tit. 32, 5842(c). 29 H. 873, 41(2). 30 VT. STAT. ANN. tit. 32, 5842(c). 31 H. 873, VT. STAT. ANN. tit. 32, H. 873, 13. Vt. Stat. Ann. tit. 32, Sec provided that the character of any S corporation item taken into account by an S corporation shareholder under Vt. Stat. Ann. tit. 32, Sec. 5911(b) is determined as if the item were received or incurred by the S corporation and not the shareholder. 34 H. 873, 41(2). 35 VT. STAT. ANN. tit. 33, 2503(a). 36 VT. STAT. ANN. tit. 33, 2503(b). 37 H. 873, 41(6). 38 H. 873, 39a.

5 Grant Thornton LLP - 5 weatherization programs and report its findings to the Vermont House and Senate by December 15, Tax Administration Filing Periods The legislation changes various quarterly filing periods to monthly filing periods. Payments of the franchise tax on financial institutions must be made monthly on or before the 25 th day of each month for the tax due in the previous month. 40 Similarly, payments of the telephone company tax under Vt. Stat. Ann. tit. 32, Sec must be made monthly on or before the 25 th day of each month for each taxable year. 41 Finally, revisions to the fuel tax provisions under Vt. Stat. Ann. tit. 33, Sec. 2503(b) require that the tax be levied and collected monthly from the seller. 42 These provisions take effect on January 1, Evaluation of Tax Expenditures As required by the Tax Expenditure Review Report 2016 (Report), 44 the legislation provides a schedule for an expedited review of certain tax expenditures for reports due in 2017, 2019, 2021, and The Report also requires a full evaluation of certain tax expenditures and the legislation directs the Joint Fiscal Office to develop recommendations for the standards and processes to conduct a full evaluation of tax expenditures. 46 Commentary Vermont s adoption of notice requirements for noncollecting vendors and its expansion of remote seller nexus marks a distinctive effort by a state to tackle the issue of lost sales and use tax revenue on transactions involving sales by remote sellers to in-state residents. Vermont s ultimate approach in this area will be driven by what happens in the near future from a national perspective, particularly with respect to the DMA litigation that has made its way through the Colorado courts, as well as the challenge to Quill that is destined to be considered by the South Dakota courts. The underlying goal of the notice requirement is to encourage noncollecting vendors to register and collect sales taxes from in-state customers rather than be subject to the administrative burden of the notification requirements. Additionally, by informing purchasers of their payment obligations, states are also hoping to induce more purchasers to voluntarily comply. Interestingly, however, Vermont s legislation is distinguishable from the Colorado notice and reporting requirements at issue in DMA as the Vermont 39 H. 873, 36a. 40 VT. STAT. ANN. tit. 32, 5836(c). 41 VT. STAT. ANN. tit. 32, 8521(a). 42 VT. STAT. ANN. tit. 33, 2503(b). 43 H. 873, 41(6). 44 H. 873, 40(a)(1). The Tax Expenditure Review Report 2016 was submitted to the General Assembly on January 15, 2016 as required by 2015 Acts and Resolves No H. 873, 40(b). 46 H. 873, 40(c).

6 Grant Thornton LLP - 6 legislation does not require noncollecting vendors to submit a report to the state tax authority. This may make it more difficult for the Vermont Department of Taxes to force compliance on purchasers. However, the legislation does provide for the Vermont Commissioner to promulgate rules to implement the notification requirements, so a reporting requirement conceivably may be implemented in the future. The effective date provision is written in a manner in which it is certain that the notice requirement will begin on or before July 1, The effective date could come earlier than July 1, 2017 if Colorado implements the notice and reporting requirements currently at issue in DMA, which presupposes that the result in DMA will favor the state. Following Colorado s victory at the U.S. Court of Appeals Tenth Circuit, DMA s petition for rehearing was subsequently denied. 47 While DMA has appealed to the U.S. Supreme Court, it remains to be seen whether the Court will take the case. In any event, noncollecting vendors will need to watch DMA and Colorado s implementation activities if the U.S. Supreme Court denies certiorari, or ultimately takes DMA and finds in favor of the state to determine when the notice requirement commences. As for the potential expansion of remote seller nexus, the Vermont legislation is similar to South Dakota s recently enacted legislation that has resulted in two pending lawsuits. 48 The South Dakota law was designed in part to develop a legal challenge that would overturn Quill. 49 However, the road to overturning Quill through the courts is a long one. The U.S. Supreme Court would have to agree to hear the case and then determine that the physical presence standard in Quill should be eliminated. Getting such a case in front of the U.S. Supreme Court may prove challenging, especially since the Court currently is only operating with eight justices due to Justice Scalia s death. In contrast to the notice requirement, the effective date provision governing the expansion of remote seller nexus is activated upon the latter of two events, and will become effective no earlier than July 1, In fact, the remote seller nexus provision as enacted will not become effective if the courts or Congress fail to act to overturn Quill. Originally, the legislation contained effective date language that would make the law effective in July 2017 without any prior action by the Supreme Court or Congress. 50 However, the fifteenmonth grace period given to the U.S. Supreme Court and Congress to resolve the issue before Vermont took the matter into its own hands was criticized and eventually dropped. 51 Again, the effective date provision makes it imperative for remote sellers doing 47 Tripp Baltz, Review Denied of Ruling Upholding Colorado's Reporting Law, BLOOMBERG BNA WEEKLY STATE TAX REPORT, April 8, Maria Koklanaris, South Dakota Sales Tax Nexus Law Proceeds Despite Litigation, TAX ANALYSTS STATE TAX TODAY, May 10, Id. SB 106 s sponsor is Sen. Deb Peters (R), a former president of the Streamlined Sales Tax Governing Board. On April 29 she told Tax Analysts that the law, which has provisions directly contrary to Quill v. North Dakota, was designed at least in part to draw a legal challenge in the hope of overturning Quill. Decided in 1992, Quill reaffirmed the physical presence standard for collecting sales tax. 50 Memorandum from William Griffin, Chief Assistant Attorney General to Senate Committee on Finance Members, March 30, Id. The grace period would not give us a legal defense to the lawsuits that would follow if Vermont enacted legislation without Supreme Court or Congressional approval. Rather, the bill s effective date language and its reference to Quill would only highlight the constitutional violation.

7 Grant Thornton LLP - 7 business in Vermont to continue to keep a close watch on national developments in this area. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.