It has been a little over a year since the United States Supreme Court Decision South Dakota v. Wayfair Inc. (June 21, 2018) completely changed state taxation. The Wayfair decision allows for states to create nexus (‘i.e., a filing requirement’) with respect to certain state and local on out-of-state retailers who lack a physical presence with the state. This decision overturned Quill Corporation v. North Dakota (May 26, 1992) which had barred states from requiring retailers to collect sales/use taxes unless those retailers had a physical presence in the state.
The specific South Dakota statute discussed in Wayfair placed a requirement on vendors to collect/remit sales tax when the vendor either:
- Make sales of $100,000 to state residents, or
- Has more than 200 separate transactions to state residents.
This ‘economic nexus’ statute was held to be constitutional and opened the door for states to implement similar requirements for state taxes.
In the year since the Wayfair decision; almost every state with a sales/use tax has implemented an economic nexus statute. Those states with a sales tax which have not already implemented economic nexus (Arizona, Florida, Kansas, & Missouri) are currently considering such legislation currently.
Economic Nexus Footprint as of 6/1/2019
As states enact these economic nexus rules there are several items for businesses to consider:
- Inconsistent thresholds – California and Texas have enacted revenue thresholds of $500K; while North Dakota and Washington have enacted $100K thresholds.
- Removal of Transaction Requirement – Many states do not include transaction requirement in economic nexus statutes or are moving away from transaction count due to lack of interpretive guidance/application.
Sales Tax Implications
Businesses making sales across multiple states need to be vary of state economic nexus statutes and regulations. State adoption of economic nexus statutes are fluid and consistently changing as states seek to expand compliance/filing requirements. This requires businesses to consider:
- Need for consulting services to review state thresholds and compare with current revenue streams.
- ERP system needs/Implementation to address items such as changing sales tax rates, taxability decisions, and other needs to assure proper customer invoicing.
- Internal personnel resources/System Automation expense to deal with registration, compliance burden, notice response and exemption certificate maintenance.
- Management of risk and potential exposures.
Other State Tax Types (Corporate Income/Franchise, Commercial Activity Taxes, etc.)
While the tax at issue in Wayfair was a sales tax; the decision has opened the door for economic nexus statutes to be utilized by states regarding other taxes as well. Some examples of this expansion include broad ‘substantial nexus’ language used by Oregon in enacting the state’s Corporate Activity Tax and the Hawaii legislature passing legislation which would impose income tax nexus on out-of-state companies that satisfy the 200 transaction or $100,000 sales thresholds.
In the year since the Wayfair decision was decided states have overwhelmingly adopted economic nexus statutes, and this trend will continue to expand over time. The need for businesses to be vigilant in reviewing state rules/regulations have never been more vital. It is very easy to trigger an economic nexus filing requirement without being aware of the compliance burdens/cost. Incurring heavy tax burdens which can be mitigated with proper tax planning.
CFGI’s State and Local Tax Practice can work directly with your team to address any concerns relating to economic nexus. Please feel free to contact our State and Local Tax Subject Matter Expert Adam DoVale (617.417.1796; firstname.lastname@example.org) with any questions.