Tax-free internet shopping bytes the dust in Rhode Island.  In August, the General Assembly followed Massachusetts’ lead in expanding the reach of its sales tax beyond its borders, increasing compliance burdens and paving the way for future audits.  Remote sellers with Rhode Island customers must now register with the Division of Taxation to collect and remit sales tax or repeatedly remind customers of their use tax obligations.

Bundled within Rhode Island’s recently passed budget bill is a sales tax revamp that cleverly interprets federal law to force many online retailers and other remote sellers to collect Rhode Island sales tax.  Prior to this recent enactment, Rhode Island customers shopping online could avoid sales tax by shopping through vendors physically located outside the state, where Rhode Island lacked authority to enforce its sales tax.  The purchases remained subject to use tax but, due to pervasive compliance issues, these purchases often avoided the 7% levy altogether.

To close this sales tax “loophole” the General Assembly faced a legal problem.  Since 1992, the law of the land, as decided in Quill Corp.  v. North Dakota, was that a retailer could not be forced to collect sales tax in a state in which it lacked a physical presence.  For 25 years, physical presence has meant buildings, property or people.  Under Rhode Island’s new law, which mimics recent Massachusetts legislation, the General Assembly has moved beyond traditional notions of physical presence to include the transient storage of data on customer computers.  In other words, binary ones and zeros have been legislatively defined as physical presence.

The new sales tax law, codified as Chapter 18.2 of Title 44, requires so-called “Non-Collecting Retailers” to register for, and obtain, a Rhode Island Sales Tax Permit beginning as of August 17, 2017.  The General Assembly defines Non-Collecting Retailers as, essentially, remote sellers making sales to Rhode Island customers and doing one of the following:

(1) Using in-state software to make sales at retail of taxable goods and/or services;

(2) Selling, leasing, delivering or participating in any activity relating to the sale, lease or delivery of taxable goods and/or services in Rhode Island (including use of a Referrer or Retail Sale Facilitator);

(3) Offering taxable goods and/or services in Rhode Island through Retail Sales Facilitators; and

(4) Engaging in remote sales into Rhode Island while maintaining an affiliate relationship with a person with a physical presence in Rhode Island.

The above list is not exclusive.  The General Assembly has cast a wide net in its attempt to define a Non-Collecting Retailer, though most remote sellers subject to new Rhode Island sales tax obligations will exhibit at least one of these four factors.  Other unique circumstances not mentioned above may also subject remote sellers to the enlarged reach of Rhode Island’s sales tax.

To preserve the likelihood that this Quill bypass will withstand judicial scrutiny, Non-Collecting Retailers only need register to collect and remit Rhode Island sales tax if, in the preceding calendar year, they either (a) received $100,000 or more in gross revenue from the sale of taxable goods and/or services to Rhode Island customers; or (b) completed 200 or more transactions involving Rhode Island customers.  Non-Collecting Retailers with insufficient sales to require registration, however, did not escape the General Assembly’s attention.

Moving forward, as of August 17, 2017, all Non-Collecting Retailers, regardless of sales tax registration requirements, must do the following:

(1) Post a notice on their website in such form as approved by the Division of Taxation.  A sample notice from the Division is available here.

(2) Notify each Rhode Island customer at the time of purchase of their Rhode Island use tax obligations.  The Division’s checkout notice is available here.

(3) Provide each Rhode Island customer with a notice 48-hours after checkout reminding the customer of their Rhode Island use tax obligations.  The Division’s 48-hour notice is available here.

(4) Provide each customer with more than $100 in purchases in the preceding calendar year with an annual use tax reminder notice by January 31 of the following year.  The Division’s annual reminder notice is available here.

(5) By February 15 of each year, the Non-Collecting Retailer must file with the Division of Taxation a signed attestation certifying compliance with the above notice requirements.  The Division’s attestation form is available here.

The General Assembly’s legislative bypass of Quill represents a sea change in sales tax compliance.  Historically, a remote seller with no physical presence in a given state did not need to collect that state’s sales tax provided the remote seller made deliveries by common carrier and otherwise avoided establishing a physical presence in the state.  Rhode Island’s new sales tax legislation upends this longstanding legal precedent and places substantial compliance burdens on remote sellers making sales to Rhode Island customers.

The tax controversy attorneys at McLaughlinQuinn LLC have substantial experience litigating sales tax matters with the Division of Taxation and will continue to watch as this sales tax situation unfolds.  For more information on this article, please contact either Thomas P. Quinn, Esq., Partner or Matthew R. Joyce, Esq., Associate