Kentucky to tax certain online sales starting July 2018

Update 7.30.2018: The Kentucky Department of Revenue now says remote retailers meeting the state's economic nexus threshold must register to collect and remit tax by October 1, 2018. Additional information.

Kentucky has enacted an economic nexus bill similar to the South Dakota measure currently under review by the Supreme Court of the United States. It takes effect July 1, 2018.

Economic nexus

Under Kentucky HB 366 (and HB 487), any remote retailer selling tangible personal property (TPP) or digital property delivered or transferred electronically to a purchaser in the state is required to collect and remit sales and use tax if in the previous or current calendar year it:

• Sold TPP or digital property that was delivered or transferred electronically to a purchaser in Kentucky in 200 or more separate transactions; or
• Had gross receipts derived from the sale of TPP or digital property in Kentucky of more than $100,000.

Economic nexus is at odds with the physical presence standard upheld by the Supreme Court in Quill Corp. v. North Dakota (1992). Quill holds that a state cannot tax a business that doesn’t have a physical presence in the state. Under economic nexus, economic activity alone triggers the tax obligation.

Accordingly, South Dakota’s economic nexus law has been challenged. The Supreme Court heard arguments in South Dakota v. Wayfair, Inc. on April 17, 2018, and is expected to issue a decision before it leaves for its summer recess at the end of June. South Dakota has asked the court to allow it to enforce its law. Wayfair et al., large online retailers, have asked the court to find the law unconstitutional.

Marketplaces defined

HB 366 also establishes definitions for “marketplace,” “marketplace facilitator,” “marketplace retailer,” and “referrer.” However, it doesn’t impose any tax collection obligation on marketplace facilitators or referrers. In fact, it specifies that “remote retailer” (“a retailer with no physical presence in Kentucky”) “does not include a marketplace facilitator or a referrer.”

The measure defines “marketplace” as “any physical or electronic means through which one or more retailers may advertise and sell or lease tangible personal property or digital property, such as a catalog, internet web site, or television or radio broadcast, regardless of whether the tangible personal property, digital property, or retailer is physically present in this state.”

It defines “marketplace facilitator” as a person who facilitates retail sales of taxable goods “directly or indirectly through agreements or arrangements with third parties,” and “collects the payment from the purchaser, and transmits the payment to the person selling the property.” Examples of online marketplace facilitators include Amazon (which also sells its own products), eBay, Etsy, and Walmart (which, like Amazon, is also a retailer).

Finally, the bill draws a distinction between a marketplace facilitator and a referrer. It defines “referrer” as a person that:

• Contracts with a retailer or its representative to advertise or list TPP or digital property for sale or lease;
• Makes referrals by connecting a person to the retailer or the retailer’s representative, “but not acting as a marketplace facilitator” [emphasis mine]; and
• Received in the prior or current calendar year, in the aggregate, at least $10,000 in consideration from remote retailers, marketplace retailers, or their representatives for referrals on retail sales to purchasers in Kentucky.

The effective date of Kentucky’s economic nexus measure is interesting, given the Supreme Court is expected to issue a decision in South Dakota v. Wayfair, Inc. by the end of June. As yet, the Kentucky Department of Revenue has not provided any information regarding the enforcement of the economic nexus provision. It’s likely waiting to see the outcome of the Supreme Court case before deciding how to move forward.

Learn more about state economic nexus laws and South Dakota v. Wayfair, Inc. at Avalara Sales Tax 360.