When Do Out-of-State Retailers Have to Pay Sales Taxes in MN?

The following post has been adopted from the Minnesota Department of Revenue’s Fact Sheet, Solicitor Nexus.

Solicitor Nexus – Presumption Applicable

Beginning July 1, 2013, an out of state retailer is presumed to maintain a place of business in Minnesota if they:

  • enter into an agreement with a resident for commission or other substantially similar consideration; and
  • the resident representative directly or indirectly solicits business from Minnesota customers to the retailer, whether by link on an Internet website or otherwise; and
  • the out of state retailer’s gross receipts over 12-months (preceding four quarterly periods) is at least $10,000.

“Resident” includes an individual who is a resident of this state or a business that owns tangible personal property located in Minnesota or has one or more employees providing services for the business in Minnesota.

“Solicitor” means a person, whether an independent contractor or other representative, who directly or indirectly, solicits business to the retailer, whether by link on an Internet website or otherwise.

For purposes of the presumption, a retailer is also considered to have met the condition of having an agreement with the solicitor where the retailer enters into an agreement with a third party, and in turn the third party enters into an agreement with a solicitor to refer customers to the retailer or act as the retailer’s representative.

In addition, if an out of state retailer solicits sales of taxable tangible personal property or services through employees, salespersons, independent contractors agents, or other representatives in Minnesota; the retailer must register to collect sales tax in Minnesota.

Advertising does not give rise to a presumption:

An agreement to place an advertisement does not rise to a presumption as described above. Placing an advertisement does not include the placement of a link on a website that, directly or indirectly, links to the website of the retailer, where the consideration for placing the link on the website is based on the volume of completed sales generated by the link.

Example 1:

ABC Company (ABC) sells specialty furniture. ABC is located in Wisconsin and has no retail outlets in Minnesota. Other than making sales of its products through delivery by common carrier trucking companies and the agreement described below, ABC has no other connection with the state of Minnesota.

ABC maintains a market for its products in Minnesota mainly by entering into agreements with interior designers located throughout the state whereby the interior designers refer customers to ABC’s specialty furniture. When a Minnesota customer purchases a product from ABC, the interior designer is identified and is paid a commission equal to 5% of the selling price of the product. From March 1, 2012 to February 28, 2013 (i.e. the preceding four quarterly sales tax periods/12 months),

ABC’s gross receipts from sales make through its agreements with the interior design companies located in Minnesota totaled $15,000.

Based on the above facts, ABC is presumed to maintain a place of business in Minnesota through solicitors and is required to be registered to collect and remit sales tax on their sales to Minnesota customers.

Example 2:

DEF Inc. (DEF) is an Internet-based retailer and sells gardening tools and equipment. DEF is located in Iowa and sells its products nationwide, including Minnesota, and its products are delivered to its customers by common carrier. Other than having customers in Minnesota and the agreement described below, DEF has no other connection with the state of Minnesota.

As part of its business plan to market its products in Minnesota, DEF enters into agreements with several garden clubs and local organizations to place online advertisements on their websites, which when clicked, lead the website user to DEF’s retail website. In exchange for placing DEF’s advertisements on its website, DEF will pay the organizations a set fee based only on the number of clicks on the link to DEF’s website, whether or not sales are made.

Based on the above facts, DEF’s agreement with the organizations is merely to place advertising to the organization’s websites. Therefore, DEF is not presumed to maintain a place of business in this state because they are not soliciting business in Minnesota through the use of independent contractors or other representatives. Therefore, DEF is not required to register and collect and remit sales tax on their sales to Minnesota customers.

Presumption that solicitation takes place may be rebutted:

A retailer may rebut the presumption that it is soliciting sales in Minnesota. For purposes of administering the presumption, the presumption will be deemed as rebutted if the out of state retailer is able to establish that the only activity of its resident representatives in Minnesota on behalf of the retailer is a link provided on the representative’s website and none of the resident representatives engage in any solicitation activity in Minnesota targeted at potential Minnesota customers on behalf of the retailer.

The inclusion of language in a contract or agreement between a retailer and a resident that prohibits solicitation by the solicitor is not sufficient, by itself, to rebut the presumption that the retailer has a solicitor in the state. In order to rebut the presumption, the retailer must be able to demonstrate both that the prohibition has been established and that the resident has complied with it. Thus, for example, a retailer may rebut the presumption by meeting both of the following conditions:

1. Contract condition

The contract or agreement between the retailer and the resident provides that the resident is prohibited from engaging in any solicitation activities in Minnesota that refer potential customers to the retailer including but not limited to: distributing flyers, coupons, vouchers, newsletters and other promotional materials or their electronic equivalents; verbal solicitation, phone solicitation and e-mail solicitation. In addition, if the resident is an organization such as a club or non-profit group, the contract or agreement must provide that the organization will maintain on its website information alerting its members to the prohibition against each of the solicitation activities described above; and

2. Proof of compliance condition

Each resident must submit to the retailer, on an annual basis, a signed certification stating that the resident representative has not engaged in any prohibited solicitation activities in Minnesota at any time during the previous year. In addition, if the representative is an organization such as a club or non-profit group, the statement must include a certification that its website includes information directed at its members alerting them to the prohibition against solicitation. Finally the certification must contain a statement alerting the representative that the certification and any information submitted with it is subject to verification by audit by the department.

  • The annual certification may be provided by the resident to the retailer in paper or electronic form. The certification must be signed by the resident. If the resident is an organization, the person signing must have authority to bind the organization. The certification must show the name and address of the resident as well as the name and address of any person signing for an organization.
  • There is no specific form required for this certification as long as all the information prescribed is included. The retailer must retain copies of the certifications that are signed by and received from the residents in either hard-copy or electronic format as part of the seller’s record keeping requirements. Also, copies must be made available on request by the department.
  • A retailer will have satisfied the certification condition if it receives the completed certifications from its resident(s) and accepts them in good faith.

If a retailer meets both the contract and proof of compliance provisions, it rebuts the presumption that they have a solicitor in the state. Consequently, the retailer will not need to register and collect tax unless the department subsequently determines that any of the residents are actually soliciting sales in Minnesota on behalf of the retailer or for some other reason.