Virginia became the latest jurisdiction to implement an economic nexus standard for sales and use tax, which will require many out-of-state retailers to collect Virginia sales tax. The legislation, SB 1083, which became law on March 26, 2019, will take effect on July 1, 2019. This gives Virginia retailers a few months to determine the impact on their businesses, unlike some states that have afforded sellers little time to prepare for possible sales tax collection requirements..
Virginia’s legislation, which is a result of economic nexus rules being deemed constitutional by the U.S. Supreme Court’s decision in South Dakota v. Wayfair, has come relatively slow compared to many others jurisdictions. Soon after the Wayfair decision was issued in June 2018, a number of states rushed to pass legislation in time for the holiday shopping season. An initial review of the Wayfair law suggests that Virginia wanted to avoid some of the lack of clarity many other states’ laws contained.
At the outset, Virginia’s rule is consistent with a large number of other states with respect to the thresholds that it sets for determining when a sales tax obligation is triggered. An out-of-state retailer, or “remote seller,” which is essentially a seller with no physical presence in Virginia, will be required to collect Virginia sales tax on in-state sales if it either:
- Receives more than $100,000 in gross revenue from retail sales in Virginia in the previous or current calendar year; or
- Engages in 200 or more separate retail sales transactions in Virginia in the previous or current calendar year
Although the thresholds in Virginia’s law are the same as many other states, due to the scope of the sales that it includes, the thresholds end up applying to less sales. Some states have drafted their legislation in a way that requires registration by as many sellers as possible. This has been done by having the thresholds above apply to total gross sales, regardless of whether the sales were retail sales, wholesale sales, taxable, or non-taxable.
Virginia has limited the sales that count towards the threshold. Specifically, only “retail sales” apply when determining if a seller has to register for sales tax collection. “Retail sale” is specifically defined in Virginia law. First, the sale needs to not be a wholesale sale (i.e. a sale for resale). Second, the sale needs to be a sale of tangible personal property or of a service that is subject to tax in Virginia. In short, the sale needs to be one for which the seller would need to collect tax. For example, a remote seller that only makes wholesale sales would not be required to register for Virginia sales tax regardless of whether its sales to Virginia customers exceed $100,000 because the sales are not sales at retail. Similarly, a seller of a Software as a service (SaaS) product to Virginia customers would not be impacted by the Virginia law because the Commonwealth does not, unlike a number of other jurisdictions, currently impose its sales tax on SaaS.
As with many other states, Virginia’s Wayfair bill also expands the sales tax collection obligations of marketplace facilitators. This aspect of the law will capture sales tax revenue from online marketplaces through which small retailers sell their products. Many of those retailers may not meet the economic nexus thresholds discussed above. However, the marketplace facilitator collection obligation will result in businesses such as Amazon.com and Walmart being required to collect Virginia sales tax on sales of products sold by third-parties through their websites.
The presumption under Virginia’s legislation is that the marketplace facilitator is the party required to collect the sales tax for sales made through its platform even if the seller individually meets one of the thresholds above. When a seller that sells products through a marketplace facilitator’s platform also makes direct sales (e.g. on its own website), Virginia’s law provides that only the direct sales are considered in determining whether the seller meets one of the thresholds above. The legislation does allow for a marketplace facilitator to apply for a waiver if certain circumstances are met, but the legislation calls for the Department of Taxation to establish regulations regarding the particular of the waive process.
The Virginia legislation was certainly something that was anticipated. Although Virginia may have missed out on months of additional revenue by taking a bit longer to pass its Wayfair law, it appear that the additional time has resulted in legislation that contain more clarity for sellers as well as marketplace facilitators. For Virginia consumers, the law means that online shopping will get a little more expensive on July 1, 2019. The legislature has estimated that bill will generate up to an additional $155 million in fiscal year 2020.
If you have any questions regarding your companies sales tax collection obligations, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.