Maryland, Virginia each address nexus standards


Joel Waterfield
Metro DC - Arlington
T +1 703 847 7595

Guinevere Seaward Shore
Metro DC - Arlington
T +1 703 637 4133

Sonia Shaikh
Metro DC - Arlington
T +1 703 637 2616

Kelsie Clifton
Metro DC - Arlington
T +1 703 637 4217

Jamie C. Yesnowitz
Washington, DC
T +1 202 521 1504

Chuck Jones
T +1 312 602 8517

Lori Stolly
T +1 513 345 4540

Patrick Skeehan
T +1 215 814 1743

Over the past several months, Maryland and Virginia have responded to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.,1 through distinct legislative and regulatory paths. Maryland adopted economic nexus provisions governing remote sellers through policy and regulations issued by the Maryland Comptroller,2 and later enacted legislation endorsing these regulations and extending economic nexus rules to certain marketplace facilitators on behalf of third-party sellers.3 In contrast, Virginia adopted legislation covering both remote sellers and marketplace facilitators as an initial step,4 with the Virginia Department of Taxation issuing additional guidance following adoption.5

Maryland guidance Comptroller’s regulatory action following Wayfair Following the Wayfair decision, many states quickly conformed to the $100,000 in sales or 200 transaction thresholds endorsed by the U.S. Supreme Court. Rather than immediately passing a law that paralleled these thresholds, however, Maryland proceeded via legislative committee action that endorsed Comptroller policy. The Maryland General Assembly’s Joint Committee on Administrative, Executive and Legislative Review specifically reviewed and approved the Comptroller’s emergency regulation to implement Wayfair through a change in the definition of “out-of-state vendor.” By doing so, the emergency regulation became effective from Oct. 1, 2018, to March 30, 2019. In the emergency regulation, the Comptroller determined that beginning on Oct. 1, 2018, out-of-state vendors would need to track gross revenues and sales delivered into Maryland to determine if the $100,000 in gross revenue or 200 transaction thresholds were met. Based on the effective date, vendors that met either requirement at any time during the fourth quarter of 2018 were required to register with the Comptroller by the first day of the following month in which either threshold was met.

The emergency regulation endorsing the Wayfair thresholds was scheduled to remain in effect until March 30, 2019. However, on Feb. 1, 2019, in contemplation of the Maryland legislature acting in this year’s legislative session, the Comptroller approved the regulation without change.

Maryland legislative action The Maryland legislature ultimately passed legislation, effective Oct. 1, 2019, referencing the regulation adopting the Wayfair standards, and by expanding the definition for “vendor” to include marketplace facilitators and marketplace sellers.6 A marketplace facilitator is deemed a person that:

“[f]acilitates a retail sale by a marketplace seller by listing or advertising for sale in a marketplace tangible personal property; and regardless of whether the person receives compensation or other consideration in exchange for the person’s services, directly or indirectly through agreements with third parties, collects payment from a buyer and transmits the payment to the marketplace seller.”7

However, the definition statutorily excludes advertising platforms or forums, specific payment processors for online sales, peer-to-peer car sharing programs, and delivery service companies that deliver tangible personal property on behalf of third-party sellers.8 A marketplace seller is defined as a person making a sale through a physical or electronic marketplace operated by a marketplace facilitator.9

Marketplace facilitators are required to collect and remit sales tax on sales by marketplace sellers to Maryland purchasers, and marketplace sellers are not required to collect and remit sales tax on these transactions if the marketplace facilitator collects the tax.10 Marketplace facilitators report the taxes from the marketplace platform separately from tax collected on sales that they or their affiliates make to Maryland purchasers.11

The legislation includes a post-enactment leniency provision that would protect marketplace facilitators from any class action lawsuits arising from overpayment of sales or use tax on facilitated sales.12 Additionally, it protects marketplace facilitators from liability for failure to collect the correct amount of tax if the facilitator is able to demonstrate that the discrepancy resulted from “insufficient or incorrect information” provided by a third-party seller.13 Under the marketplace facilitator provisions, the Comptroller is only allowed to audit the marketplace facilitator for sales within the platform, not the marketplace seller.14 Finally, the Comptroller cannot impose penalty or interest on a marketplace facilitator failing to collect and remit the sales tax if the marketplace facilitator can prove a hardship implementing the computer programs needed to collect the sales tax.15

Virginia guidance Virginia legislation The Commonwealth requires all dealers with nexus to collect and remit applicable sales and use tax.16 Effective July 1, 2019, legislation provides uniform nexus requirements for remote sellers, marketplace facilitators, and marketplace sellers.17 Dealers with no Virginia physical presence are required to collect and remit sales tax if they have more than $100,000 in Virginia gross sales or complete greater than 200 separate transactions in Virginia during the current or previous calendar year.18

A remote seller is any dealer deemed to have sufficient activity to require registration to collect and remit sales tax, should the nexus requirements be met, and includes any software provider acting on behalf of the dealer.19 A marketplace facilitator is defined as any person who contracts with a marketplace seller to facilitate the sale of products through a physical or electronic marketplace.20 Marketplace facilitators are deemed to have sufficient nexus with the Commonwealth if they: (i) engage in at least one of three activities related to the marketplace; (ii) engage in at least one of six activities with respect to a marketplace seller’s products; and (iii) meet one of the above economic threshold tests through facilitation activity.21 Finally, a marketplace seller is defined as a person that makes sales through any physical or electronic marketplace operated by a marketplace facilitator.22

Regulatory guidance Following adoption of the Virginia legislation, the Department issued updated guidance for remote sellers and marketplace facilitators. Interestingly, the Department issued the guidance not in the form of a rule or regulation required to go through an administrative process, but in accordance with the Commissioner’s authority to supervise the administration of Virginia’s tax laws. By issuing guidance in this manner, the Department’s interpretation does not have the effect of law or regulation.

While much of the guidance is dedicated to reiterating the legislation, the updated guidance does break some new ground. For example, the Department addresses the situation where a taxpayer may meet at least two of the remote seller, marketplace seller and marketplace facilitator classifications. The Department notes that in cases where marketplace facilitators also sell at retail, such taxpayers are required to collect sales tax on both the facilitated and direct sales transactions. The Department explained what happens in a “dual role” situation through an example.

In the example, a marketplace facilitator operates a website where sellers list items for sale via auction or on a marketplace-type platform. The goods for sale on the marketplace are only owned by sellers, not the facilitator. Concurrently, the facilitator also makes direct sales to Virginia customers. A seller, in turn, sells its goods on the marketplace, and directly through its own website. The facilitator exceeds the Wayfair thresholds, but the seller does not exceed the Wayfair thresholds to the extent of its direct sales.

In this scenario, the marketplace facilitator must collect sales tax on both the transactions it facilitates and its direct sales, including the seller in the example. The seller is not authorized to collect and remit sales tax on the sales made on the marketplace, and does not have the obligation to collect and remit sales tax on its own sales apart from the marketplace because the Wayfair thresholds have not been reached. If, on the other hand, the seller’s direct sales exceeded the Wayfair thresholds, the seller would have to collect and remit sales tax on its own sales apart from the marketplace (though it still would not be authorized to collect and remit sales tax on the marketplace sales).

The Department also created an example to explain how the attribution of sales activity rules works in the case of a marketplace facilitator, its wholly-owned affiliate, and marketplace seller all making retail sales. The facilitator sells to Virginia customers via its website and electronic application, the affiliate sells to Virginia customers via its website, and the marketplace seller does not sell to any Virginia customers. In the case where the facilitator and its affiliate exceed the Wayfair thresholds in the aggregate with respect to sales to Virginia customers (even though they do not by themselves), both entities must register, collect and remit sales tax on their sales. In the case where the facilitator and the affiliate’s sales do not reach the Wayfair thresholds, but the marketplace seller makes enough Virginia sales under the facilitator’s platform to reach the Wayfair thresholds when combined with the facilitator and the affiliate’s sales, the aggregation rule applies and the facilitator must register, collect and remit sales tax. The affiliate would not have to register, collect and remit in this situation.

With respect to registration requirements, the Department notes that when an unregistered dealer establishes economic nexus and becomes a remote seller or marketplace facilitator, sales tax registration is required no later than 30 days from the date economic nexus is established. Dealers establishing economic nexus as of July 1, 2019, must register for transactions occurring on or after that date. If a registered dealer later fails to meet the Wayfair thresholds, it may cease collection of sales tax, but must restart collecting within 30 days of re-establishing nexus.

The Department’s guidance on sourcing rules requires that sales by dealers in Virginia be sourced to the city or county in which the dealer’s place of business is located, even if the goods are ultimately delivered to a different location. A marketplace facilitator accepting and processing orders to Virginia customers through a website or electronic application may use destination-based sourcing if unable to associate the order with a physical place of business in Virginia.23 For example, a seller having no physical presence in Virginia but registered to collect tax as a remote seller should use destination-based sourcing, under which each transaction is sourced to the locality where the buyer is located.

The Department provides several administrative procedures governing the ability for marketplace facilitators to apply for a waiver from collection and remittance on sales within the marketplace if all of the marketplace sellers are registered dealers, or the waiver is based on the argument that collection and remittance is an undue burden. The Department also adopts several administrative simplification measures through its guidance in an effort to ease compliance, including enhancement of its online lookup tool to aid taxpayers, a commitment to perform single state and local tax audits and only require the filing of a single return per month, and provision of at least 30 days’ notice for any rate changes.

Commentary The paths by which Maryland and Virginia adopted economic nexus provisions applicable to remote sellers and marketplace facilitators were distinct, but they have led to the same general endgame: remote sellers and marketplace facilitators exceeding the Wayfair thresholds will have to collect and remit sales taxes to these states. These rules are in line with most states’ policies post-Wayfair, even though the Wayfair case did not address marketplace facilitator arrangements, and the marketplace facilitator rules that have been adopted across the states have varied greatly in terms of effective dates, definitions, collection requirements, the potential for waivers from these requirements, and liability protection afforded to marketplace facilitators.

Based on Maryland and Virginia’s substantial market bases, the revenue effect of these enactments should be significant. In Maryland, from a fiscal perspective, the legislation is expected to increase coffers “by a potentially significant amount,” starting in 2020. An actual numerical estimate is not specified by the state as it is dependent on “the number of transactions that occur and the taxable value of the transactions.”24 However, according to Alan Brody, a spokesman of the Office of the Comptroller, the office already collected $32.4 million in the first four months of the corresponding emergency legislation.25 Through April 2019, Maryland has collected an additional $83.4 million in sales and use tax revenue compared to the previous fiscal year.26

Across the Potomac River, increased revenue collections resulting from Virginia’s remote seller and marketplace facilitator provisions are also expected to be substantial. According to fiscal estimates, the legislation is expected to generate $155 million in revenue for the 2020 fiscal year, and increasing to $175 million a year for 2021 through 2023.27 The Department expects revenues to grow over time as internet sales continue to increase.

1 138 S. Ct. 2080 (Jun. 21, 2018). For a discussion of this case, see GT SALT Alert: U.S. Supreme Court Decides South Dakota v. Wayfair, Overruling Quill Physical Presence Requirement.
2 Maryland General Assembly Joint Committee on Administrative, Executive and Legislative Review, Synopses of Emergency Regulations, received Aug. 2, 2018; Tax Alert Regarding the United States Supreme Court Decision South Dakota v. Wayfair and its Implications for Sale[s] Tax Nexus, Comptroller of Maryland (Sept. 14, 2018); MD. REGS. CODE
3 Chs. 11-12 (S.B. 728), Laws 2019; enacted without Governor’s signature on May 25, 2019, effective October 1, 2019, and only applicable to taxable sales occurring on or after the effective date.
4 Ch. 815 (H.B. 1722) and Ch. 816 (S.B. 1083), Laws 2019. Both bills are identical and were enacted on March 26, 2019. See GT SALT Alert: Virginia Advances Federal Conformity Date and Adopts Remote Seller Economic Nexus Standards.
5 Guidelines for Remote Sellers and Marketplace Facilitators, Virginia Department of Taxation, June 27, 2019.
6 MD. CODE ANN. TAX-GEN. § 11-101(o)(1)(v), (vi).
7 MD. CODE ANN. TAX-GEN. § 11-101(c-2)(1).
8 MD. CODE ANN. TAX-GEN. § 11-101(c-2)(2).
9 MD. CODE ANN. TAX-GEN. § 11-101(c-3)(2).
10 MD. CODE ANN. TAX-GEN. § 11-403.1(a).
11 MD. CODE ANN. TAX-GEN. § 11-403.1(d).
12 MD. CODE ANN. TAX-GEN. § 11-403.1(e)(1).
13 MD. CODE ANN. TAX-GEN. § 11-403.1(f)(2). The legislation also provides for marketplace facilitators and marketplace sellers that are publicly traded communications companies (or affiliates) to apply to the Comptroller to waive the marketplace facilitator collection requirement, to the extent the seller collects and remits sales tax instead. MD. CODE ANN. TAX-GEN. § 11-403.1(h).
14 MD. CODE ANN. TAX-GEN. § 11-403.1(i).
15 Chs. 11-12 (S.B. 728), Laws 2019, § 3(a).
16 VA. CODE ANN. § 58.1-612.
17 VA. CODE ANN. § 58.1-612.C.
18 VA. CODE ANN. § 58.1-612.C.10, .11. The legislative language allows the potential for these thresholds to match federal thresholds, should Congress prospectively establish any. It should be noted that sales made by all commonly controlled persons must be aggregated in computing the gross revenue and transaction threshold amounts.
19 VA. CODE ANN. § 58.1-602.
20 VA. CODE ANN. § 58.1-612.1.A. Marketplace facilitators do not include payment processor business or platforms exclusively providing Internet advertising services. VA. CODE ANN. § 58.1-612.1.C.
21 VA. CODE ANN. § 58.1-612.1.C. A marketplace facilitator may apply for a waiver of the obligation to collect and remit taxes if either: (i) all of its marketplace sellers are registered dealers; or (ii) the marketplace for whom the marketplace facilitator does not wish to collect tax has sufficient nexus to register as a dealer and collection of the tax by the facilitator would create an undue burden for either party. VA. CODE ANN. § 58.1-612.D(3). In addition, limited relief from liability (which cannot exceed the amount of tax exclusive of applicable penalties and interest) is available for remote sellers and marketplace facilitators in the event that sales taxes are incorrectly collected. VA. CODE ANN. § 58.1-612.1.E. Finally, any liability is relieved if the error is due to reasonable reliance on information provided by the Commonwealth. See VA. CODE ANN. § 58.1-625.D(2).
22 VA. CODE ANN. § 58.1-612.1.A.
23 VA. CODE ANN. tit. 23 § 10-210-2070.
24 S.B. 728: Fiscal and Policy Note, Maryland Department of Legislative Services.
25 Lauren Loricchio, Maryland Legislature Approves Marketplace Facilitator Bill, STATE TAX TODAY, April 15, 2019.
26 Comparative Statement of Net Sales and Use Tax Receipts, Comptroller of Maryland, April 2019.
27 H.B. 1722 Fiscal Impact Statement, Virginia Department of Taxation, Feb. 15, 2019.

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.