At a Glance...

The Minnesota Legislature passed HF1 to impose sales and use tax collection obligations on "marketplace providers"–defined broadly to capture online websites that facilitate sales of tangible personal property from retailers to Minnesota-customers. If signed by the governor, this legislation would be the first in the country to impose collection obligations on marketplace providers. It would become effective July 1, 2019 or when the U.S. Supreme Court overturns Quill Corp. v. North Dakota.

Summary of Legislation

On May 25, 2017, the Minnesota Legislature passed HF1, a bill to impose a sales and use tax collection obligation on "marketplace providers." Just two days prior, the bill was first introduced in the House of Representatives. And after voting to pass the legislation, the bill was sent to the Senate on the same day. The bill passed both chambers with more than 50% support, and now proceeds to the governor for signature.

The legislation makes two critical changes to the existing sales and use tax regime. First, the definition of "retailer maintaining a place of business in this state" is amended to include a retailer who makes sales through a "marketplace provider" operating in Minnesota. "Marketplace provider" is defined as "any person who facilitates a retail sale by a retailer" through either of the following activities:

  • Listing or advertising for sale by the retailer in any forum, tangible personal property, services, or digital goods that are subject to tax
  • Entering into agreements with third parties for collecting payment from the customer and transmitting that payment to the retailer, regardless of whether the marketplace provider receives compensation or other consideration in exchange for its services

By expanding the definition of "retailer maintaining a place of business in [Minnesota]," this legislation effectively creates nexus for any online retailer selling goods through a marketplace provider, regardless of whether the retailer is "physically present" in Minnesota. However, if the online retailer makes less than $10,000 in taxable retail sales in the previous 12 months, it is not considered to be "maintaining a place of business" in Minnesota.

Second, this bill requires the marketplace provider to collect and remit sales and use tax for the retailer's sales it facilitates. However, if the retailer registers to collect sales and use tax in Minnesota, the marketplace provider is not required to collect tax. Under existing law, only a retailer has an obligation to collect and remit sales tax. This legislation shifts that collection obligation to the marketplace provider, unless the retailer registers to collect Minnesota tax on its sales. This provision is particularly concerning given the compliance burdens it places on marketplace providers—either collect tax on behalf of your marketplace vendors or implement expensive systems changes to start collecting information on their tax registration status (and take on the audit risk down the road).

What's Next?

The bill is now before the governor for his signature. Because this bill was passed during a "Special Session" of the legislature, the governor has 14 days from when the bill was delivered to him to sign or veto the legislation. If the governor takes neither action, the bill will become law even without his signature. The bill was delivered to the governor on May 26, which gives him until June 9 to act.

If enacted, the legislation will not become effective until either (1) the U.S. Supreme Court "modifies" its decision in Quill Corp. v. North Dakota, or (2) July 1, 2019. This delayed effective date reflects the legislature's recognition that, under existing Supreme Court precedent, the bill is unconstitutional. However, state legislatures have a tendency to "view and copy". South Dakota's economic nexus bill spawned numerous copy-cat bills around the country, several of which have passed. Marketplace vendors and vendors that sell through online marketplaces should be concerned that similar legislation could be proposed in other states that are taking aggressive positions.

State legislatures are focused almost exclusively on the Commerce Clause restrictions on their taxing authority. With the battle lines drawn over Commerce Clause nexus, states may forget that other provisions of the U.S. Constitution—as well as federal law—restrict their ability to impose tax collection obligations. So even if Quill is overturned, this legislation may be challenged as violating, among other laws, the Due Process Clause and the Internet Tax Freedom Act. 

About Reed Smith State Tax

Reed Smith's state and local tax practice is composed of more than 35 lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues. Click here to view our State Tax team.

This article is presented for informational purposes only and is not intended to constitute legal advice.