Remote use tax collection legislation advances. A Mississippi bill to require use tax collection by remote sellers passed the House of Representatives and was transmitted to the Senate on February 7. The bill, H.B. 480, would require out-of-state sellers lacking a physical presence in Mississippi to register and begin collecting use tax if their prior-year retail sales of tangible personal property to Mississippi customers exceeded $250,000. Those sellers meeting this threshold would be deemed to have a “substantial economic presence” in the state.

Another important aspect of the bill is that it purports to set aside 70% of future use tax collections made by taxpayers covered by the new nexus standard to fund badly needed improvements to Mississippi’s roads and bridges. Also going into that fund would be any collections made by “voluntary taxpayers”, which is defined to mean “a taxpayer that does not have nexus with this state for sales tax purposes but voluntarily collects and remits use tax to this state on behalf of this state.” This roads-funding provision has garnered widespread support throughout the Mississippi business community for passage of the bill.

The next deadline for Senate action on the H.B. 480 should be February 28.

The original Senate companion bill, S.B. 2456, died in committee on January 31.

Public hearing conducted on proposed regulation. On February 15 the Department of Revenue conducted a public hearing on Proposed Regulation 35.IV.3.09 which would closely follow the provisions currently contained in H.B. 480. Prior to the hearing, Jones Walker submitted the following comments and questions to the Department seeking clarification of a number of technical and procedural issues raised by the proposal. The hearing was well attended and generated robust discussion, and the Department provided the informal feedback on these questions noted below.

  • The proposed regulation unambiguously states that the Department can require an out-of-state party to collect Mississippi use taxes even if the seller lacks any in-state physical presence. The United States Supreme Court twice concluded in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967) that a state cannot impose a use tax collection requirement on an out-of-state seller, consistent with the Commerce Clause of the United States Constitution, absent a physical presence in the state. Considering the Court has not overturned or otherwise limited these decisions, does the Department intend to suspend enforcement of this proposed regulation unless and until the United States Supreme Court reverses its prior decision in Quill?

A: The Department stated that it fully understood the regulation was in direct defiance of and was a challenge to Quill and National Bellas Hess, and that the Commissioner was personally aware of that fact, but the Department believes the regulation and its requirements are appropriate and authorized based on their perception that the United States Supreme Court might overturn the physical presence standard at some point in the future.

They clearly stated they intended to immediately enforce the regulation upon finalization. When pressed by other attendees as to where the Department or the Commissioner derives its authority to adopt a rule openly defying the Supreme Court, the response was somewhat unspecific and merely referred back to its authority to interpret its existing statutes.

  • Assuming the Department intends to enforce the regulation immediately, does the Department intend to apply the $250,000 sales / nexus rule retroactively to tax periods preceding the adoption of the new regulation?

A: The Department stated that it believes the $250,000 standard is not a new standard, but merely an interpretation and application of the longstanding (but generally unenforced) statute conferring nexus upon whose who have “purposefully and systematically” exploited the Mississippi market. See current Miss. Code Ann. § 27-67-4(2)(e). As such, the Department suggested the standard is more of a safeguard or a “safe harbor” than it is a new nexus standard and will exclude smaller sellers who could otherwise have nexus with lower levels of sales. They clearly stated that the regulation is currently worded to apply the new standard on a retroactive basis, but indicated they were open to comments on the topic and that the final rule may or may not authorize retroactivity.

  • If House Bill 480 is not enacted into law, does the Department intend to finalize and begin enforcing the proposed regulation prior to any statutory change?

A: The Department stated that the proposed regulation “was not proposed in conjunction with” H.B. 480 and the clear indication was that they believe they have authority to proceed to finalization in the absence of any additional legislative action.

  • Section 201 of the regulation states that an out-of-state seller must register to collect Mississippi use taxes if its prior year Mississippi sales exceed $250,000. Section 202, reflecting the historic text of Section 27-67-4(2)(e), then states that nexus exists only if the seller has “purposefully and systematically” exploited the Mississippi consumer market. Please explain how the Department intends to reconcile these two provisions. Specifically, will the Department require both purposeful and systematic exploitation of the Mississippi consumer market in addition to the $250,000 annual sales threshold, or will these sections operate independently of one another such that a taxpayer will have nexus upon separately satisfying either standard?

A: Because the Department views the $250,000 as interpretive of the existing “purposeful and systematic” language in the statute, they believe the sections operate such that both provisions likely have to be satisfied for nexus to exist. They admitted they had not fully considered the circumstances in which one could have a high volume of targeted sales yet not meet the $250,000 threshold, or vice versa, but would consider those scenarios and how those could impact enforcement.

One hearing officer conceded that a single transaction over the threshold may not be sufficient, but they appreciated the constitutional significance of the question and indicated they would take that under consideration as they finalized the regulation.

This led to a follow-up question whether the $250,000 nexus conclusion was rebuttable based on a particular taxpayer’s facts and circumstances (especially in light of recent Due Process Clause decisions by the United States Supreme Court), or if it was a bright-line hard rule. They stated they would take under consideration what criteria they might consider if the standard were viewed as rebuttable.

  • Please explain how the Department intends to construe and apply the term “purposefully” in Section 202. What specific types of online activities will be considered purposefully directed toward the Mississippi consumer market, especially in the context of modern internet-based commerce, and what types would not?

A: The Department indicated it had not fully vetted this question and would take it under consideration and possibly provide illustrative examples.

  • Please explain how the Department intends to construe and apply the term “systematically” in Section 202. By way of example, how many transactions must occur to constitute the systematic exploitation of the Mississippi consumer market, does it depend upon which party initiated the transactions (buyer, seller or third party), and over what period of time must those transactions occur to satisfy this standard?

A: Similarly, the Department indicated it had not fully vetted this question and would take it under consideration and possibly provide illustrative examples.

  •  As currently worded, a new seller having $250,000 of sales in Year 1 would not have a use tax collection obligation until the following Year 2, based on Year 1 sales. If that seller had less than $250,000 in sales in Year 2, he would have no collection obligation in Year 3 and could deregister. If he had sales later in Year 3, he would not have a collection obligation. If this the Department’s interpretation and intended application of the rule?

A: The Department acknowledged that as written, this is probably an accurate interpretation of the proposed regulation but were not entirely certain that was what was intended. They will consider the issue especially in light of taxpayers’ justifiable concerns whether they can rely upon the regulation’s bright-line test as drafted without incurring nexus exposure.

  • If a seller triggers the use tax collection requirement due to the $250,000 prior-year sales threshold, is it the Department’s position that the seller has nexus the following year and is no longer voluntarily collecting the use tax?

A: The Department verified that anyone crossing the $250,000 threshold would have nexus and collection would no longer be voluntary. When asked why satisfying the “doing business” standard would not render them liable for collection of sales tax rather than use tax (i.e., they could at that point be considered an in-state vendor), the Department had difficulty articulating a clear response. Depending upon how a taxpayer reported its collections, there could be significant statute of limitations ramifications if a seller technically qualifies under both chapters.

  • What procedures does the Department intend to implement to ensure use tax assessments are not issued on the same transaction against both the purchaser and an online seller of an item?

A: The Department has not considered any additional policies or procedures to address this issue. While this is already an existing issue under present audit practices, they did acknowledge that the issue would likely occur far more frequently once the regulation goes into effect and would take the question under advisement.

  • How much Mississippi use tax does the Department believe is presently going uncollected each year due to remote sales addressed by the proposed regulation?

A: Based in part on prior studies by the University of Tennessee, the Department estimates that between $100,000,000 and $150,000,000 of use tax is going uncollected per year, but could not identify or even estimate how much of that would be collected as a result of the new rule even assuming full compliance. The phrase “best guess” was used by the Department, but they could not articulate a firm factual basis for that estimate.

  • How many out-of-state sellers does the Department anticipate will be required to collect Mississippi use taxes as a result of this proposed regulation, how many of those does the Department consider to be “small businesses”, and what are the aggregate costs the Department anticipates all sellers will incur to comply with the new collection and remittance requirements?

A: Similarly, the Department did not have an estimate of how many new out-of-state taxpayers would fall within the scope of the rule.

  • What was the Department’s basis for concluding the proposed regulation did not require an economic impact statement pursuant to Section 25-43-3.105?

A: Because the Department considers the $250,000 to be an interpretation of existing law, they appeared to consider all who fall under the new sales threshold to already be subject to the use tax collection responsibility (constitutional limitations notwithstanding). Based on this, they do not consider the rule to impose any new compliance obligations on any out-of-state sellers.

The Department could enact the regulation in its current form or could modify it in response to these questions. We will continue to monitor developments at the Capitol and the Department of Revenue on these issues.