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How Does Economic Nexus Apply To More Than Just Sales Tax?



Monika Miles

Last year’s Wayfair v. South Dakota decision changed the way states define nexus for sales tax purposes. In the past, a business needed to establish physical presence, but the Supreme Court’s decision set precedent for states to establish economic nexus parameters, thereby mandating a certain percentage of sales made within the state are subject to sales tax.

However, it’s important to note that economic nexus doesn’t only affect sales tax. If your company conducts a certain amount of business within the state, it may also be responsible for collecting and remitting all applicable taxes, not just sales tax.

AccountingWeb does a terrific job explaining the following ways states and cities are applying economic nexus to their jurisdiction. Note that some are not necessarily new, but more states ARE considering economic nexus in areas beyond sales tax. Here’s a quick summary to get you started.

Economic Nexus & State Tax Provisions
  • In Hawaii, economic nexus also applies to income tax. As of July 1, 2018, a person with no physical presence in the state is subject to Hawaii’s income tax if:
    • They engage in 200 or more business transactions
    • The sum of their gross income from sources in Hawaii equals or exceeds $100,000
    • If they conduct business inside and outside of the state, the number of their sales made in Hawaii equals or exceeds $100,000
  • Beginning in January 1, 2020, Texas will apply economic nexus provisions to the state’s franchise tax. Any company with more than $500,000 in gross receipts from business done in Texas is subject to the state tax.
  • In Washington, any out-of-state business making retail sales into the state, and that meet the state’s economic nexus thresholds, are subject to the state’s Business and Occupation (B&O) tax. Washington’s thresholds are:
    • More than $285,000 in annual gross receipts attributed to Washington
    • At least 25 percent of annual receipts attributed to the state
Economic Nexus & City Tax Provisions

States aren’t the only ones applying economic nexus provisions to their taxes. Several cities are also defining ways out-of-state companies conducting business in their city need to pay a local tax.

  • In Portland, Oregon, companies that establish economic nexus are responsible for paying a one percent surcharge on gross revenue from retail sales within the city. Portland’s thresholds are met if a company has more than $1 billion in total annual retail revenue and more than $500,000 comes from Portland.
  • In San Francisco, California, any business that receives more than $500,000 in total gross receipts in the city establishes economic nexus and is required to register and pay:
    • Gross receipts tax
    • Payroll expense tax
    • Other city taxes

Now that most states have economic nexus provisions in place for sales tax, we think it’s likely more and more of them will define additional ways to apply it to local or state income tax as well. It will definitely be interesting to see how it plays out!

In the meantime, do you want to know more about economic nexus and how it may affect your company?

Contact Monika Miles

 

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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