Publisher's note: The author of this post is Lindsay Marchello, who is an associate editor for the Carolina Journal, John Hood Publisher.
Department of Revenue cites South Dakota law to justify boosting online sales tax collections
Editor's note: This story was updated Friday, Aug. 10, to include a response from Department of Revenue spokesman Schorr Johnson.
The state Department of Revenue is gearing up to assess sales taxes on more out-of-state online retailers who make sales to North Carolina residents. But it's unclear whether the department has the legal authority to do so, a former legislative leader says.
NCDOR on Tuesday issued a directive requiring online retailers not physically in North Carolina to start collecting sales taxes on sales sourced to the state. The move may result in a tax increase of as much as $400 million, according to the N.C. Retail Merchants Association.
While the directive cites a recent U.S. Supreme Court decision and existing law as the basis for expanding tax collections, the legislature hasn't passed a new statute implementing that court decision.
Article II, Section 23 of the N.C. Constitution says the General Assembly must pass all revenue (tax) laws:
- No law shall be enacted to raise money on the credit of the State, or to pledge the faith of the State directly or indirectly for the payment of any debt, or to impose any tax upon the people of the State, or to allow the counties, cities, or towns to do so, unless the bill for the purpose shall have been read three several times in each house of the General Assembly and passed three several readings, which readings shall have been on three different days, and shall have been agreed to by each house respectively, and unless the yeas and nays on the second and third readings of the bill shall have been entered on the journal.
The Cooper administration's directive cites a section 5 of an existing law, N.C. Gen. Stat. § 105-164.8(b):
- "The retailer, by purposefully or systematically exploiting the market provided by this State by any media-assisted, media-facilitated, or media-solicited means, including direct mail advertising, distribution of catalogs, computer-assisted shopping, television, radio or other electronic media, telephone solicitation, magazine or newspaper advertisements, or other media, creates nexus with this State."
The Cooper administration's citation of the statute ends there, but the actual statute doesn't. The next sentence reads:
- "A nonresident retailer who purchases advertising to be delivered by television, by radio, in print, on the Internet, or by any other medium is not considered to be engaged in business in this State based solely on the purchase of the advertising."
In other words, state law says an out-of-state online merchant merely promoting its products in North Carolina doesn't have a presence here.
This is an important exemption the directive fails to mention, said Paul "Skip" Stam, a Wake County attorney and former House majority leader.
"That sentence that the N.C. Department of Revenue leaves out was added [to the law] later than the first sentence. It is misleading not to include that sentence, which seems to completely contradict the sentence they do quote,"
The Cooper administration's move comes in light of the South Dakota v. Wayfair Supreme Court decision. In the June ruling, the court found that a vendor selling to consumers in other states can be compelled to collect and pay out-of-state sales taxes even if it doesn't have a physical presence in the taxing jurisdiction.
Wayfair reversed the 1992 Quill v. North Dakota ruling. The Quill court said sellers must pay sales taxes only in the states where they have a physical presence, such as a warehouse or retail location. (Consumers are supposed to pay use taxes on all items they buy, wherever they're purchased, but the law is rarely enforced on out-of-state purchases.)
The Quill decision is often credited for the explosion in online retail commerce, to the chagrin of brick-and-mortar merchants.
Wayfair doesn't order states to start collecting these online sales taxes. Instead, it allows states to implement laws that do so.
Starting Nov. 1, 2018, the department would require all remote sellers with gross sales exceeding $100,000 or more than 200 separate transactions sourced to North Carolina to register, collect, and remit sales and use tax to the state. NCDOR spokesman Schorr Johnson said the threshold comes from South Dakota.
But it isn't in North Carolina law. The language can be found, however, in a bill that hasn't passed.
Senate Bill 81, Sales Tax Economic Nexus for Remote Sales, clarifies that a retailer includes a person who facilitates a sale on behalf of a third party, including transactions made through mobile phone apps, Amazon, eBay, and other online forums. This clarification means whoever facilitates a sale is a retailer and must collect and remit sales tax on the sales price.
The Department of Revenue defends the directive.
"The Secretary of Revenue has the power under N.C. Gen. Stat. § 105-264 to interpret North Carolina sales and use tax law,"
Stam wouldn't say the directive violates the separation of powers between the executive and legislative branches. But, he said, it raises lots of questions about why the department would leave key language out of its order.
Johnson said he would check on why the language was omitted and respond Friday. (See update below.)
While S.B. 81 passed the Senate, it remains in the House Rules Committee. The House could take up the bill when the General Assembly returns in November - if lawmakers wanted to take advantage of the Wayfair decision.
Carolina Journal asked for comment from House Speaker Tim Moore, R-Cleveland, and Senate leader Phil Berger, R-Rockingham. Neither immediately responded.
UPDATE: In an email sent Friday, August 10, Johnson responded:
Existing state law, which was enacted by the legislature, directed the North Carolina Department of Revenue to collect sales taxes on remote sales. However, the state could not enforce this until the Supreme Court clarified the constitutionality of that law enacted by North Carolina and multiple other states. In June, the Supreme Court said it was constitutional in the South Dakota v. Wayfair case in which North Carolina field an amicus brief in support of South Dakota.
N.C. Gen. Stat 105-164.8 (b) concerning remote sales begins "[a] retailer who makes a remote sale is engaged in business in this State and is subject to the tax levied under this Article if . . . (5) [t]he retailer, by purposefully or systematically exploiting the market provided by this State by any media-assisted, media-facilitated, or media-solicited means, including direct mail advertising, distribution of catalogs, computer-assisted shopping, television, radio or other electronic media, telephone solicitation, magazine or newspaper advertisements, or other media creates nexus with this State."
The above describes a remote seller - a retailer who 1) makes a remote sale and 2) purposefully or systematically exploits the market provided by this State. Remote sellers are the population the directive wants to reach.
The second sentence in (5) states "[a] nonresident retailer who purchases advertising to be delivered by television, by radio, in print, on the Internet, or by any other medium is not considered to be engaged in business in this State based solely on the purchase of the advertising."
The second sentence describes a nonresident retailer who solely purchases advertising. This sentence clarifies that solely purchasing advertising does not result in a person being engaged in business in this State. Rather, a retailer must make a remote sale and do one of the listed actions to be engaged in business in this State.
The second sentence was not included in the directive because it does not describe retailers who make remote sales and to prevent any confusion.