In the United States, the sales tax landscape has changed dramatically 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 create guidelines/thresholds for economic nexus. In a previous blog, we talked about this epic decision. Through December, over 30 states had enacted economic nexus legislation. But we had not heard from New York.
What is Economic Nexus?
Prior to the Wayfair decision, 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 had 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 means that if companies have sales of a certain dollar amount or have a certain number of transactions with a state, the state can require the company to register, collect and remit sales tax.
In most states, economic nexus is based on a sales or transactions threshold. For instance, the South Dakota law has thresholds of $100,000 in sales or 200 transactions. Additionally, some states base their economic threshold on taxable sales, while other states mention gross sales. See our previous blog where we discuss this.
States Enacting Laws
The Supreme Court ruled in this monumental decision 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. We recently blogged about how California and Texas are the latest states to create such legislation. And now New York is taking its turn in the spotlight. Given the state’s usually aggressive nature, it has been a bit surprising that the New York Department of Taxation and Finance initially remained silent on the issue.
New York also Jumps Aboard the Train
As one of the most populous states in the country, New York has been closely watched by the sales tax community. Yet until recently, the state has been silent on the subject of economic nexus and Wayfair.
Finally, on January 15, 2019 New York’s Department of Taxation and Finance issued a state notice that explains its position on economic nexus for sales tax purposes.
According to Department Notice N-19-1, New York has enacted economic nexus legislation for out of state vendors. A business that has no physical presence in New York State but has both made more than $300,000 in gross sales of tangible personal property delivered in the state (for both taxable and exempt sales) and has conducted more than 100 sales of tangible personal property delivered into the state in the immediately preceding four sales tax quarters is required to register as a sales tax vendor, and collect and remit the applicable state and local sales tax.
Consequences
Unlike other states, New York has not set a specific effective date for enforcing economic nexus. The Department of Taxation and Finance’s position is that remote sellers are liable immediately following the U.S. Supreme Court Decision that was decided seven months ago. Why?
New York had a “dormant” economic nexus statute on its books in Tax law §1101(b)(8)(i)(E), which indicates that if a seller systematically solicits business in the state by any means then it qualifies as a vendor. However, limiting language also required that the solicitation must meet nexus requirements of the U.S. Constitution. As such, New York argues that both tests are met as of the U.S. Supreme Court’s ruling in Wayfair in June 2018.
According to an article by Avalara, and per other state tax legal experts, if New York does hold taxpayers liable for sales tax back to last June, it increases the likelihood that its policy will be challenged.
Other Nuances
According to an article by JDSUPRA, the law as currently written (and the notices) refer to sales of tangible personal property, not services. Many of our clients are in the software or SaaS (software as a service) industries. New York taxes both of these as sales of Tangible Personal Property, so the Department will most likely view these sales as tangible personal property, subject to the economic nexus rules.
How can we help?
Ask us about our “Wayfair Review” where we assist companies to make sense of all the filing requirements in New York and the many other states that have enacted economic nexus in recent months. Understanding where and when you need to file is half the challenge. Contact us at info@milesconsultinggroup.com.
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 New York, as well as updates for other states.
