Virginia to tax out-of-state and marketplace sales

Update 3.27.2019: Gov. Northam approved SB 1083 on March 26, 2019. Sales tax economic nexus and a sales tax collection obligation for marketplace sellers take effect in Virginia on July 1, 2019. See below for details.

Legislators in Virginia are making short work of a measure to tax remote sales and require marketplace facilitators to collect tax on third-party sales. Since the opening of the 2019 legislative session on January 9, they’ve quickly approved Senate Bill 1083 and passed it on to Governor Ralph Northam, who’s expected to sign it: His 2018–2020 budget includes revenue from internet sales.

Like other states, Virginia was once prohibited from taxing sales by businesses with no physical presence in the state. That changed when the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018). According to the Wayfair ruling, “economic and virtual contacts” between a state and a business are a sufficient basis for sales tax nexus.

Wayfair lifted the physical presence barrier without replacing it with a bright-line test. However, the court did highlight three aspects of South Dakota law that “appear designed to prevent discrimination against or undue burdens upon interstate commerce,” and most states are adopting similar provisions. These are:

• Safe harbor for small sellers
• Simplified sales tax reporting and compliance (South Dakota is a member of the Streamlined Sales and Use Tax Agreement)
• Prospective enforcement of the remote sales tax requirement

Virginia has followed South Dakota’s example.

Safe harbor for small sellers

Like South Dakota’s economic nexus law, Virginia SB 1083 allows an exception for small sellers; remote retailers are required to collect and remit Virginia sales tax only if, in the current or previous calendar year, they:

• Receive more than $100,000 in gross revenue from retail sales in Virginia, “or other minimum amount as may be required by federal law;” or
• Engage in 200 or more separate retail sales in Virginia, “or other minimum amount as may be required by federal law.”

Note that the measure is adaptable. Should Congress intervene and establish a safe harbor provision that differs from the $100,000 sales/200 transactions threshold adopted by Virginia, South Dakota, and many other states, Virginia SB 1083 can adapt with it.

For remote marketplace sellers that make sales through multiple channels — their own and a third-party marketplace — the threshold is calculated using the marketplace seller’s direct sales.

Simplified compliance

While Virginia isn’t a member of the Streamlined Sales and Use Tax Agreement (SST), SB 1083 calls upon the Virginia Tax Commissioner to simplify sales and use tax compliance for remote sellers as follows:

1. “Provide adequate information to remote sellers to enable them to identify state and local sales and use tax rates and exemptions [the commissioner must provide remote sellers with at least 30 days’ notice of a rate change];

2. Provide adequate information to software providers to enable them to make software and services available to remote sellers;

3. Ensure that if the Department requires a periodic audit the remote seller may complete a single audit that covers the state and local sales and use taxes in all localities; and

4. Require no more than one sales and use tax return per month be filed with the Department by any remote seller or any software provider on behalf of such remote seller.”

Prospective enforcement

Virginia will not enforce remote sales and use tax provisions prior to July 1, 2019. However, transactions occurring before July 1, 2019, may be included in determining whether the sales or transaction threshold has been met.

Collection requirements for marketplace providers

SB 1083 also imposes a sales and use tax collection requirement on certain marketplace facilitators who contract with a marketplace seller to facilitate the sale of their products in Virginia through a physical or electronic marketplace.

The collection requirement applies to marketplace facilitators with economic nexus in Virginia. As with remote sellers, economic nexus in Virginia is established when, in the current or previous calendar year, a marketplace facilitates:

• Sales in Virginia that generate more than $100,000 in gross revenue, or other minimum amount as may be required by federal law, for the marketplace facilitator; or
• 200 or more separate retail sale transactions, or other minimum amount as may be required by federal law

In other words, once SB 1083 takes effect on July 1, 2019, marketplace sellers won’t collect sales and use tax on transactions made through a marketplace facilitator with nexus in Virginia — the marketplace facilitator will.

However, marketplace facilitators may obtain a waiver from the collection requirement for a marketplace seller that already has nexus with Virginia, or that establishes economic nexus under SB 1083. The Virginia Department of Taxation is tasked with developing guidelines that establish criteria and process for obtaining such a waiver, etc. Stay tuned.

Though marketplace facilitators will generally be held liable for tax on third-party sales, they’ll be relieved from such liability caused by seller errors.

More than 35 states have adopted economic nexus since the Wayfair decision, including California, New York, and Texas. Fifteen states have specific requirements for marketplace sales. Learn more about state remote sales tax laws.