In the United States, the sales tax landscape has changed drastically due to the recent U.S. Supreme Court Case of South Dakota v. Wayfair (June 2018). Following this landmark decision which made it easier for companies to create nexus in states, many states have enacted legislation which establishes guidelines, thresholds for economic nexus. In a previous blog, we talked about this epic decision.
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 (or taxable presence) in a state. This meant that a company needed to have offices, inventory, employees, or contractors in a state for a certain amount of time. Companies now don’t necessarily need to have physical presence in a state for them to create nexus; they now can have nexus in a state by virtue of economic nexus. Economic nexus essentially means that companies with sales of a certain dollar amount or a certain number of transactions with a state are required to register, collect and remit sales tax. Some states require both criterion. Additionally, note that some states base their economic threshold on taxable sales, while other states mention gross sales.
States Enacting Laws
The Supreme Court ruled in its monumental decision in South Dakota v. Wayfair, Inc., that it was constitutional for the State of South Dakota to enact an economic nexus law. Since then, there has been a flurry of activity among states enacting economic nexus laws, similar to the one in South Dakota. Over 30 states have already passed this type of legislation. And now two of the biggest states in the country, California and Texas, are taking their turn in the spotlight. In a previous blog in October of 2018, we reported that these two states had proposed legislation. Now their respective taxing agencies have committed to time frames and thresholds for compliance.
California Jumps on Board the Economic Nexus Bandwagon
The California economic nexus law will go effect on April 1, 2019. So, businesses making sales into CA should begin to make plans to register, collect and remit.
The threshold for economic nexus is $100,000 in sales or 200 transactions, the same as the South Dakota thresholds in the Wayfair Case.
California has a statute in place which already allows for enforcement of an economic nexus standard. California Revenue and Taxation Code §6203(c) indicates that a “retailer engaged in business in this state” means “any retailer that has substantial nexus with this state for purposes of the commerce clause of the US Constitution”. The 1992 Quill case had interpreted substantial nexus to mean a substantial physical presence. But in the recent Wayfair case the US Supreme Court held the physical presence rule of Quill to be “unsound and incorrect”. So, now, effectively §6203(c) will rely on the holding in Wayfair, which considers transactional or economic nexus to be the commerce clause interpretation.
As such California believes it can require companies meeting the South Dakota thresholds ($100,000 of sales OR 200 transactions) to register and file in the state.
This collection requirement is not retroactive, meaning it applies only to sales occurring on and after April 1, 2019.
Observers had been hopeful that due to the size of the state (40 million people in California, versus 1 million in South Dakota), consideration would be given to increasing the threshold to at least $500,000 in sales and also a higher minimum number of transactions before the economic nexus rules would kick in. However, the CDTFA indicated that the agency doesn’t have the authority to choose a threshold that differs from the one dictated in the Wayfair case. That decision must be made through the state legislature, and they have not yet indicated that they intend to legislate different thresholds.
So, if you are a business that already has operations in California, it’s business as usual. And, if you are an out of state seller with no physical presence nexus in the state, but you anticipate $100,000 in sales or 200 transactions, now would be a good time to begin considering the following items:
Evaluate the volume of sales to California customers;
Examine the taxability of your products. California’s rules on taxability often differ from other states and it is important to remember that not all states apply sales tax uniformly to all products and services. California has many interesting nuances;
Consider implementing an automated reporting and compliance system. If you’re a multi-state seller, you’ve probably already begun to file in many states. Prepare to add California in April 2019, and to include correctly reporting the district sales tax portion as well. (It’s likely you’ll need some software to assist with this.)
Stay up to date with economic nexus legislation in California and other states here.
Texas also Jumps on Board the Economic Nexus Bandwagon
In the wake of the Wayfair decision, Texas has moved more cautiously, but is now also ready with economic nexus. Texas Comptroller, Glenn Hegar explains: “It’s up to my office to implement the principles of the Wayfair decision in the way that best serves the state of Texas, our citizens and the businesses operating here. We’re going to make sure that we do this carefully, deliberately and with ample input from the public, the legislature and the business community.” The state’s economic nexus law is going into effect October 1, 2019. This is to provide remote sellers with additional time to prepare for their collection and reporting obligations.
The state’s threshold will be $500,000; and there is not a transactional threshold in Texas. According to the Comptroller’s office, the higher threshold is intended to protect small businesses.
Due to the complexities surrounding this U.S. Supreme Court decision, it is helpful to consult with tax professionals, like Miles Consulting Group, to assist you. Stay tuned to our future blogs for further details on these two giants jumping on board the economic nexus bandwagon, as well as updates for other states.
If your company is doing business in one of these states and you are not collecting and remitting sales tax to the state, contact