On April 19, 2021, Florida Senate Bill 50 was enacted into law. The legislation modernizes Florida’s sales and use tax system and imposes tax collection obligations on remote sellers and marketplace providers. Among the many reforms in the new legislation is the imposition of sales tax on “remote sales” and requiring tax collection by sellers lacking a physical presence in Florida. Remote sellers (seller with no physical presence in Florida) are required to collect Florida tax if they have in excess of $100,000 of retail sales for delivery into Florida in the previous calendar year. The new legislation also extends these sales tax collection obligations to marketplace providers that facilitate and collect payment for sales made by remote sellers utilizing their platform. In such instances, the marketplace provider, rather than the remote seller, would collect and remit Florida sales tax. These remote seller and marketplace provider obligations become effective July 1, 2021.
The new legislation also provides a “safe harbor” from potential past Florida tax liability. A remote seller required to collect and remit Florida tax under the new legislation will be relieved from liability for tax, penalty, and interest due on remote sales made before July 1, 2021, if they register with the Florida Department of Revenue before October 1, 2021. A similar safe harbor is provided for marketplace providers.
States desperate for an influx of cash just received a blessing from the United States Supreme Court through the Court’s decision in South Dakota v. Wayfair. The decision reverses prior decisions in Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois, which provided that only a business with a physical presence in a state could be required by that state to collect sales tax. In South Dakota v. Wayfair, the Court found that a “substantial nexus” with a state, rather than physical presence, is all that is required for a state to have the power to require an out-of-state business to withhold and pay sales tax.
For years, businesses have avoided the collection of sales tax on online sales by working around the physical presence requirement. Catalogs and phone orders were the original avenues allowing a business to reach more customers without establishing a physical presence in new jurisdictions. The growth of online sales has only compounded the problem faced by state budgets.
Until South Dakota v. Wayfair, a business making an online sale to a customer located in a state where that business does not have a physical store could not be required to collect sales tax on that sale. The sales tax owed would, in theory, be paid directly by the customer, with the customer required to report the sale and pay a use tax to his or her home state. Such use taxes are nearly impossible for states to enforce, with less than two percent of taxpayers ever reporting the use taxes they owe. Unfair competitive advantages have arisen as online retailers sell their goods for a lower, tax-free price than what could be offered by a local store selling from a physical location and required to collect sales tax at the time of sale.
States have attempted to fight back against the physical presence requirement through a number of different tax laws and strategies. The law brought before the Supreme Court in South Dakota v. Wayfair required any business with $100,000 or more of sales delivered to South Dakota or engaging in 200 or more separate transactions for the delivery of goods into the state to withhold and pay sales tax directly to the state. In upholding the law, the Court defined substantial nexus as when a taxpayer “avails itself of the substantial privilege of carrying on a business in that jurisdiction.”
With states having broader reach to directly tax sales, we can expect a more level playing field between online retailers and brick and mortar shops. We can also expect states looking to expand the reach of their sales tax laws to pass new legislation affecting a broader number of businesses. Businesses conducting sales online to customers in other states must be aware of new requirements a state may impose on the collection and payment of sales tax and what sales may be subject to the withholding of tax by the seller.