In the United States, the sales tax landscape has drastically changed following the June 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. In this landmark decision, the high court ruled that it was constitutional for South Dakota to enact an economic nexus law. While this may seem like old news, we are still receiving queries every single day about economic nexus and how it impacts our clients.
As a result of the Supreme Court’s decision, over the last year, most of the states which impose a state-level sales tax have jumped on the economic nexus bandwagon and have enacted “Wayfair” types of laws. States are eager to collect sales tax (as well as other types of taxes) and, in theory, want to make it easier for companies to pay their taxes. In addition to physical presence, if companies create economic nexus in a state, that requires them to collect and remit sales tax and also file sales tax returns, provided the state has enacted an economic nexus statute, which again, most of them have at this point!
What Is Economic Nexus?
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 for them to create nexus, they now can have nexus in a state by virtue of economic presence alone. But, to clarify – physical presence still creates nexus as well.
In states which have enacted statutes, economic nexus is generally based on 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 just one of the two.
In the South Dakota case, for instance, the thresholds are $100,000 in sales or 200 transactions. Many states have adopted those thresholds, while the largest population states of California, New York and Texas have recently adopted a $500,000 minimum threshold of sales. This tends to help smaller companies because they won’t hit those numbers as quickly and become obligated to adhere to the collection and remittance of sales tax rules.
Also note that some states base their economic nexus threshold on taxable sales, while other states base this threshold on gross sales.
How Many States Have Already Enacted Economic Nexus Legislation?
Most states have jumped on the Wayfair bandwagon and passed economic nexus legislation (Avalara has a nice map, updated regularly, that shows all of them). It’s important to look at each one carefully as some states initially set the thresholds at a certain number of sales and/or transactions, and then passed additional legislation changing those numbers.
How Could Economic Nexus Impact You?
The U.S. Supreme Court’s ruling in South Dakota and the flurry of states which enacted legislation soon afterward made it easier for companies to establish nexus. If your company is doing business in a state where you didn’t have physical presence before this ruling, chances are you now have nexus through economic presence in many states and will need to register, collect and remit sales tax to each one. Many states enacted economic nexus legislation in 2018 and they became effective in late 2018 and early 2019. So, many companies are already behind in their compliance efforts.
We recommend our clients engage in a nexus study right away to prepare themselves for proper filing in these many states going forward. We can also assist with remediation in the form of voluntary disclosure agreements and other avenues. Contact us today for help with yours! We are happy to help with all of your multi-state tax needs, from understanding economic nexus provisions to conducting due diligence and more!
