In the United States, the sales tax landscape is drastically changing due to the recent U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. In a previous blog, we talked about how the High Court made a landmark decision in June of 2018 that makes it easier for companies to create nexus in states. It ruled in its monumental decision, that it is constitutional for the State of South Dakota to enact an economic nexus law.

As a result, more states are jumping on the economic nexus bandwagon and enacting economic nexus laws too. States are eager to collect sales tax and, in theory, want to make it easier for companies to pay their taxes. In addition to physical presence, if companies also have economic nexus in a state, that qualifies them to pay sales tax to the state, provided the state has enacted an economic nexus statue.

What is economic Nexus?

In the past, companies needed to have physical presence, or “boots on the ground,” in a state in order to have nexus in a state. This usually meant that a company needed to have an office, inventory or employees in a state for a significant amount of time. Companies now don’t necessarily need to have physical presence in a state for them to have nexus; they now can have nexus in a state by virtue of an economic presence.

In states which have enacted statutes, economic nexus is based on sales or a number of transactions threshold- if either is met, economic nexus is triggered. Some states require both criteria for economic nexus to be valid, while others require just one of the two. In the South Dakota Case, for instance, the thresholds are $100,000 in sales or 200 transactions. Additionally, some states base their economic threshold on taxable sales, while other states base this threshold on gross sales.

How many states have already enacted economic nexus legislation?

Many states have already jumped on the Wayfair bandwagon and have passed legislation regarding economic nexus. Rhode Island, Ohio, Oklahoma, Pennsylvania, Hawaii, Maine, Massachusetts and Vermont are all states that have already enacted economic nexus laws. Be aware of states like Pennsylvania, where the threshold is low. Companies only need to sell $10,000 worth of goods into their state to exceed the economic threshold nexus standard.

Which states are on the horizon to enact economic nexus laws?

On September 1, Mississippi is the next state with its effective date for economic nexus. For example, the state will start requiring retailers who sell $250,000 worth of goods into their state to start paying sales tax. Mississippi does not require a certain number of transactions, just a certain dollar amount.

October 1 is a popular effective date for states and their economic nexus laws. These include Alabama, Illinois, Indiana, Kentucky, Michigan, Minnesota, North Dakota, South Dakota, Washington and Wisconsin.

North Carolina’s legislation is effective on November 1. After that, Connecticut begins on December 1.

In addition, Georgia, Iowa and Louisiana and Nebraska all have January 1, 2019 effective dates.

How could this impact you?

The U.S. Supreme Court just made it easier for companies to have nexus in states. Therefore, it is now easier for states to collect sales taxes from those companies. Prior to this ruling, states just had to have physical presence in a state in order to have nexus. The Supreme Court ruling now essentially says that a reasonable amount of transactional activity is constitutional to create nexus.

If your company is doing business in a state and you didn’t have physical presence in a state before this ruling, chances are you now have nexus via an economic presence in many of them and will need to register, collect and remit sales tax to the state.

What’s next?

Stay tuned to find out which states will further enact economic nexus laws. Note that some of the larger states like California, New York and Texas have not yet enacted economic nexus statutes.

We are recommending our clients engage in a nexus study within the next few months to prepare themselves for proper filing in these many states.

Have questions? Contact Monika Miles.