Maryland Emergency Regulations and Tax Alert in Wake of Wayfair

Wayfair discards the antiquated “physical presence rule” – a rule which allowed retailers lacking a physical presence in a state to avoid any obligation to collect and remit sales taxes. Significantly, the Court overruled the long-standing interpretation of the Commerce Clause, finding that “the physical presence rule of Quill is unsound and incorrect,” and that virtual and economic contacts may indeed satisfy the necessary substantial nexus requirement. In Wayfair, the Court ultimately upheld the South Dakota statute requiring retailers without a physical presence in South Dakota to collect sales tax for either annual in-state sales exceeding $100,000, or at least 200 transactions involving in-state deliveries.

Until now, Maryland regulations lacked an economic nexus standard-maintaining only a physical presence standard. Maryland’s new emergency regulations mimic the provisions of the South Dakota statute upheld in Wayfair with its new section .33B(5) to COMAR 03.06.01.33 which states that:

[A] person engages in the business of an out–of–State vendor if (1) the person sells tangible personal property or taxable services for delivery in the State, if, during the previous calendar year or the current calendar year, the person (a) has gross revenue from the sale of tangible personal property or taxable services delivered in the State that exceeds $100,000 or (b) sold tangible personal property or taxable services for delivery into the State in 200 or more separate transactions.

In other words, remote vendors have sufficient economic nexus and, thus, must collect Maryland sales tax for their deliveries in Maryland if, during the previous or current calendar year, they have either (1) more than $100,000 (gross) in property or service sales delivered in Maryland, or (2) at least 200 separate sales transactions into Maryland.

The emergency regulations are effective October 1, 2018, and expire on March 30, 2019. Upon expiration, the normal rulemaking process must occur-including a period of time provided for public comment.

With the implementation of the emergency regulations, it is imperative that remote vendors maintain records to evaluate whether or not they have sufficient economic nexus. Fortunately, on September 14, 2018, the Comptroller of Maryland issued a Tax Alert to provide additional guidance to remote vendors about this.

The Tax Alert emphasizes that once the emergency regulations are effective on October 1, 2018, all remote vendors should begin tracking gross revenues and sales delivered in Maryland to determine whether they have sufficient economic nexus. According to the Tax Alert, the tracking requirement is not applicable to sales delivered into Maryland before October 1, 2018.

If a remote vendor does have sufficient economic nexus under the emergency regulations, the Tax Alert indicates that from October 1, 2018 through December 31, 2018, those vendors are required to register with the Comptroller and remit sales tax as soon as such nexus is established. The Tax Alert notes that remote vendors should use a monthly filing schedule, but such schedule is subject to adjustment by the Comptroller’s office depending on the amount of taxable sales. Additionally, registration with the Comptroller is required by the first day of the following month in which the remote vendor’s nexus was sufficient; however, remote vendors may voluntarily register and collect Maryland sale tax before October 1, 2018, if they wish.

For the 2019 calendar year and thereafter, the Tax Alert provides that even remote vendors previously exempt from registration must track all sales delivered into Maryland. Any time during the calendar year that sufficient economic nexus is established, the remote vendor must register with the Comptroller by the first day on the following month and immediately begin collecting Maryland’s sales tax.

The Tax Alert further clarifies that remote vendors with sufficient economic nexus should continue to track sales delivered into Maryland; however, remote vendors lacking such nexus may discontinue collecting Maryland sales tax. Those remote vendors that discontinue collecting the tax should still maintain accurate records that clearly show that the criteria were not met.

Finally, the Tax Alert provides six examples to illustrate the emergency regulations’ tax collection and remittance obligations. All examples assume that the remote vendors lack a physical presence in Maryland. The examples provided in the Tax Alert are as follows:

• Example 1: If an out-of-state vendor had gross revenues of $100,000.01 or 200 or more sales transactions between January 1, 2018 and September 30, 2018, the out-of-state vendor does not have nexus with Maryland because the tax collection and remittance obligation for the out-of-state vendor is not based on sales made prior to October 1, 2018. Therefore, the out-of-state vendor is not required to register and begin collecting and remitting sales tax on that date. The out-of-state vendor must, however, begin tracking gross revenue and sales transactions into Maryland starting on October 1, 2018.
• Example 2: If an out-of-state vendor had gross revenues of $99,999.99 or less or 199 or fewer sales transactions from October 1, 2018 through December 31, 2018, the out-of-state vendor does not have nexus with Maryland in 2018 and is not required to register and begin collecting sales tax on January 1, 2019. The out-of-state vendor must, however, track gross revenue and sales transactions into Maryland during calendar year 2019to see if it meets the criteria.
• Example 3: If an out-of-state vendor has gross revenues of $100,000.01 or 200 or more sales transactions on December 15, 2018, the out-of-state vendor has nexus with Maryland and is required to register by January 1, 2019 and begin collecting sales tax as of January 1, 2019. The out-of-state vendor must file its first sales and use tax return and remit sales tax collected on February 20, 2019 and must continue collecting, reporting and remitting sales and use tax to Maryland for each month in 2019, unless the Comptroller’s Office advises the out-of-state vendor that it may report on a less frequent basis. The out-of-state vendor must also track its gross revenue and sales transactions into Maryland throughout 2019.
• Example 4: If an out-of-state vendor did not have nexus with Maryland in 2018 (based on its gross revenue or sales transaction criteria from October through December 2018), but the out-of-state vendor satisfied the gross revenue or sales transaction criteria at a point in 2019, it will have nexus with Maryland and must begin collecting and remitting sales tax in Maryland. For example, if on March 15, 2019, the out-of-state vendor has gross revenues of $100,000.01, or the out-of-state vendor has 200 or more sales transactions, the out-of-state vendor must register with the Comptroller’s office and begin collecting sales tax on April 1, 2019. The out-of-state vendor must file its first sales and use tax return and remit sales tax collected on May 20, 2019.
• Example 5: If an out-of-state vendor has nexus with Maryland because it satisfied either the gross revenue or sales transaction criteria by December 31, 2018, the out-of-state vendor must collect and remit sales and use tax in 2019.The out-of-state vendor must also continue to track gross revenue and sales transactions during calendar year 2019. If by December 31, 2019, the out-of-state vendor has gross revenues of $99,999.99 or less or 199 or fewer sales transactions, then as of January 1, 2020, the out-of-state vendor no longer has nexus with Maryland and may discontinue collecting and remitting sales tax on that date. However, the out-of-state vendor must continue tracking gross revenue and sales transactions during calendar year 2020. If the out-of-state vendor meets any of the gross revenue or sales transaction criteria at any time in 2020, the out-of-state vendor must begin collecting sales and use tax again.
• Example 6: If an out-of-state vendor has gross revenues of $125,000.00 from sales of tangible personal property into Maryland, and those Maryland sales consist of $75,000.00 in tangible personal property that is not taxable in Maryland and $50,000.00 in tangible personal property that is taxable in Maryland, the out-of-state vendor has nexus with Maryland when its gross revenue exceeds $100,000. For purposes of meeting the gross revenue or sales transaction criteria, all gross revenue and sales transactions are considered regardless of whether the gross revenue and sales transactions consist of sales that are subject to Maryland sales and use tax.

Remember, the emergency regulations are effective beginning October 1, 2018 through March 30, 2019. Under these regulations, remote vendors with sufficient economic nexus must collect and remit Maryland sales tax for their deliveries in Maryland. Sufficient economic nexus exists if, during the previous or current calendar year, a remote vendor has either (1) more than $100,000 (gross) in property or service sales delivered in Maryland, or (2) at least 200 separate sales transactions into Maryland.