Economic Nexus In the Nation’s Capital

The District of Columbia has announced it will require non-local businesses to collect and remit sales tax on sales they make to D.C. residents. The District is joining with a number of states that have established what is being called “economic nexus” following the decision by the U.S. Supreme Court last year to relax restrictions on when a tax authority can impose tax obligations on non-local businesses.

This will likely impact the direct-to-consumer (DtC) wine market, as previously, wineries making DtC sales to D.C. that did not have a physical presence there were not obligated to pay sales taxes to the District.

D.C. first announced its intention to establish economic nexus last October in a public hearing; this was later approved by the D.C. Council, and finally signed by the D.C. Mayor in January.

Under the terms of D.C.’s economic nexus rules, all remote businesses selling to D.C. residents will be required to collect and remit D.C. sales tax if they:

  1. Have annual gross revenue of sales in the District that exceed $100,000; or
  2. Make 200 or more separate transactions to the District in a 12-month period.

While these rules were only signed in late January, they are being applied retroactively to all sales made after January 1, 2019. Anyone who met the sales or transactional threshold last year will need to remit tax on sales after January 1, and begin collecting sales tax for remittance after they have registered with the D.C. Office of Tax and Revenue.

D.C.’s filing frequency depends on how great of a tax liability a business has in a given period: for a liability of $200 or less per period, file annually; for a liability of $201-$1,200 per period, file quarterly; and if the liability is greater than $1,200 per period, monthly filings are required.

The standard sales tax rate in the District of Columbia is 6 percent, meaning any swag or merchandise you sell to a D.C. resident is properly taxed at this rate. However, the sale of off-premises alcohol (meaning alcohol sold outside of a restaurant setting) is taxed at the special rate of 10.25 percent. This special rate applies to the sale of DtC wine.

In addition, starting on April 1, 2019, any marketplace provider (think of an online bazaar, like eBay or Etsy, that facilitates retailers but does not sell products itself) will need to collect and remit sales tax on behalf of its users.

Because the District of Columbia is a federally administered region of the U.S., new rules and regulations proffered by its Council must also go through a 30-day review by the U.S. Congress before it can become effective. As such, there is the possibility Congress will reject D.C.’s economic nexus rules in the weeks to come. It is unknown how likely such a rejection would be — in fact it’s rather rare for Congress to object to D.C. policies — but it provides an interesting opportunity for different state representatives to hash out their support or objections to economic nexus rules (for instance, legislators from states like New Hampshire, which do not have sales tax, have been vocally opposed to expanding nexus obligations).

Wineries making DtC sales to D.C. residents should take note of this rule change and review the amount of sales they are making to the District. If they exceed either of the thresholds above, they will need to begin collecting and remitting sales tax. Wineries should also note that D.C. applies a tax rate of 10.25 percent for all sales of off-premises consumption alcohol, rather than the standard 6 percent rate for general merchandise. Since DtC sales of wine would be considered off-premises sales, the 10.25 percent rate would apply.

ShipCompliant users will be able to receive the proper tax rates for both their wine sales and any general merchandise they sell to D.C., along with the necessary tax returns.

With D.C. adding economic nexus rules, the number of states where DtC wine shippers do not have a sales tax obligation is dwindling. Currently, only a handful of states either do not require DtC licensees to become sales tax collectors or have economic nexus rules. However, it is likely these states will follow what is happening across the country and add economic nexus rules in the future. As such developments happen, we will keep you informed.

 

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