As we discussed in February, the Tenth Circuit upheld the constitutionality of Colorado’s use tax notification law with its decision in Direct Marketing Association v. Brohl (DMA II). In his concurrence to the decision, Judge Gorsuch predicted that “many (all?) states can be expected to follow Colorado’s lead and enact statutes like the one now before us.” (See Gorsuch, J., concurring, at 9). It appears that Vermont may be the first Colorado follower.
Vermont is a seasoned player in the game of sales and use tax nexus and collection. In 2011, the state began requiring retailers who make sales into Vermont to notify their customers of a potential use tax liability. And beginning December 1, 2015, Vermont’s click-through nexus law went into effect, which requires retailers who enter into certain referral agreements with Vermont residents to collect sales tax.
H 873, which would implement a Colorado-style use tax notification system, currently sits in Vermont’s Senate Finance Committee, having already passed the Vermont House on March 24. H 873 implements its reporting obligations using very similar language to that found in the Colorado law and regulations. As an initial matter, the bill would define a “noncollecting vendor” as a vendor that sells taxable products or services to purchasers who are not exempt from the sales tax, but that does not collect Vermont sales tax. (See Section 22).
The bill would then require noncollecting vendors to do three things. (See Section 23). First— similar to the 2011 law —noncollecting vendors must notify purchasers of their Vermont use tax obligations. Second, noncollecting vendors must send a statement to Vermont purchasers each January 31 showing the amount of Vermont purchases made from the vendor in the previous year. Third, noncollecting vendors must file an annual statement with the Vermont Department of Taxes for each Vermont purchaser, identifying the amount paid by the purchaser for Vermont purchases. The bill provides penalties for failure to comply, which for a large retailer could be substantial ($5 per failure to notify; $10 per purchaser for failure to provide a statement; $10 per purchaser for failure to file the annual statement with the Department).
In an apparent attempt to exempt smaller retailers and smaller purchasers, the bill provides thresholds below which the notification requirements would not apply. To trigger the notification requirements, the noncollecting retailer must have made $50,000 or more of sales into Vermont in the previous year, and the Vermont purchaser must have made at least $500 worth of purchases from the retailer.
In addition to imposing the reporting requirement, H 873 would make another subtle change to Vermont’s sales tax law. The bill would amend the definition of “vendor,” and by doing so expand the universe of potential “noncollecting” vendors. (See Section 24). Under current law (and notwithstanding the physical-presence requirement of Quill), Vermont defines a “vendor” to include any person who regularly solicits sales of tangible personal property in the state and had sales within the state of at least $50,000 in the previous 12 months. Under H 873, a “vendor” would include a person that either regularly solicits sales or made $100,000 worth of sales (or 200 individual sales transactions) within the state in the previous 12 months. While certain retailers may benefit from the change in definition, for the most part, the bill’s modification of the term “vendor” would make it more likely that an out-of-state retailer will fall subject to Vermont’s use tax reporting requirements.
As the Tenth Circuit pointed out in DMA II, the practical purpose of requiring out-of-state sellers to report in-state sales may be to prod them into voluntarily collecting sales tax. Nonetheless, it’s a less aggressive strategy for increasing tax revenues than enacting a collection law that directly challenges the physical presence requirement of Quill (e.g., South Dakota). We agree with Judge Gorsuch’s prediction that states will be emboldened by DMA II to enact new sales and use tax burdens on out-of-state sellers. It will be interesting to see whether the next round of states mimic the full-frontal assault of South Dakota or the more moderate peripheral attack of Colorado and (perhaps) Vermont.