It’s hard to believe that it has been two years since the landmark decision in South Dakota v. Wayfair (2018) that changed the sales tax landscape. The high court’s decision on June 21, 2018 was that South Dakota’s economic nexus law was constitutional and that the state could require companies who met certain sales thresholds to collect and remit sales tax on sales to South Dakota customers, even if the company had no physical presence. The decision effectively changed the way states define nexus for sales tax purposes.
The Supreme Court’s ruling did not automatically make this the law of the land for all 50 states. It was a South Dakota case, so the ruling just applied to South Dakota. However, in the last two years, states have been jumping on the economic nexus bandwagon and enacting laws similar to those of South Dakota. States have long been searching for new ways to bring revenue into their state and the Wayfair case gave them a long-awaited opportunity to do so.
What is Economic Nexus?
The Supreme Court ruled that it is constitutional for companies to have economic nexus in states. But what does that mean? In the past, companies needed to have physical presence, or “boots on the ground,” in order to create nexus in a state. This usually meant that a company needed to have an office, inventory or employees in the state (this includes inventory held at third party warehouses). Following the Supreme Court’s Wayfair ruling, physical presence is no longer needed in order to create nexus, they now can have nexus in a state by virtue of economic presence alone. This is discussed in a previous blog. But, to clarify – physical presence still creates nexus as well.
Economic nexus is generally based on either the amount of gross 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 a sales threshold.
In South Dakota, for instance, the threshold is $100,000 in sales or 200 transactions. Many states have adopted similar thresholds, while the largest population states of California, New York and Texas have adopted a $500,000 threshold of sales. This tends to help smaller companies because they won’t reach those numbers as quickly and become obligated to adhere to the rules for collection and remittance of sales tax.
Also note that some states base their economic nexus threshold on taxable sales, while other states base this threshold on gross sales.
Economic Nexus Laws Around the Country
In the two years since the Supreme Court ruled in Wayfair, almost all of the states around the country have implemented economic nexus laws. As mentioned, these laws outline a specific threshold in terms of dollar amount or number of transactions and the specific period that this threshold applies to. These laws vary by state and can be confusing. For instance, many states had an enforcement date in October, November or December of 2018. Many other states had enforcement dates in early 2019. The challenge for multi-state sellers is to determine exactly the date that they exceeded the threshold and must begin filing. While retroactive enforcement wasn’t part of the legislation in most states (i.e.; states didn’t go back and have measurement dates before 6/21/18), it’s easy to see how, now, in 2020, if companies haven’t dealt with the issue, there CAN be retroactivity back to 2018 or 2019, depending on their historical sales data. We still consult with clients almost every day who have a retroactive issue in one or more states.
Here are some examples of economic nexus nuances in various states:
Most states around the country have adopted a sales threshold of $100,000. However, some of the bigger states (i.e., California, New York, Tennessee and Texas) to do business in have a larger threshold of $500,000.
Louisiana’s economic nexus law finally goes into effect on July 1, 2020. The sales threshold is $100,000 or 200 transactions and applies to the previous or current calendar year.
The two hold-out states are Florida and Missouri. These two states have not enacted economic legislation yet.
According to the Sales Tax Institute, Florida has proposed three different pieces of economic nexus legislation, but each have failed to pass in the state legislature
According to an article by Avalara, the MO legislature has begun the process of falling in line with virtually all of the other states by introducing a new bill that would adopt economic nexus as the basis for taxing remote sellers. Missouri legislature’s bill SB 529 would require remote sellers (beginning 10/1/2020), and marketplace facilitators (beginning 1/1/2022) to collect and remit sales and use taxes for sales of at least $100,000 into Missouri. This bill does not have a transaction threshold component. But we will await to hear if these bills are enacted or not.
Are you a company that is filing in states where you have physical presence and think that is enough? Many companies (even two years after the case) still don’t realize they’ve created economic nexus. We can assist by performing a Wayfair Diagnostic. As part of that, we also help companies who end up having retroactive liability and filing requirements to file voluntary disclosure agreements (VDAs). In a prior blog we talk about voluntary disclosure agreements and why they are often a good option for limiting penalties, and also offer other benefits
As discussed, we still field questions around this topic daily – so if you call us to ask questions, you’re in good company! We are seeing even more questions come in from foreign companies who never had physical presence in the US, but now have economic nexus. Stay tuned to our future blogs for further updates from states (i.e., Florida and Missouri) who have yet to enact economic nexus legislation.
Have a question? Contact Monica Miles And Team.