It’s hard to believe that it has been three years since the landmark decision in the Supreme Court Case of South Dakota v. Wayfair (2018) that changed the sales tax landscape. The high court’s decision 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 in the state. The decision effectively added another means that states can create nexus in a state 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, since then, 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, businesses needed to have physical presence, or “boots on the ground,” in order to establish nexus in a state. This usually meant that a company was required 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 number 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 triggered while others require a sales threshold only.
In South Dakota, for instance, the threshold is $100,000 in sales or 200 transactions. Many states have adopted similar thresholds, while the states with the largest populations like California, New York and Texas have adopted a $500,000 threshold of sales and no transaction limit. 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 three years since the Supreme Court ruled in Wayfair, most 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 the exact 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 2021, if companies haven’t dealt with the issue, there CAN be retroactivity back to 2018, 2019 or 2020, 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, and Texas) have a larger threshold of $500,000.
- Louisiana’s economic nexus law went into effect on July 1, 2020. The sales threshold is $100,000 or 200 transactions and applies to the previous or current calendar year. Most states have thresholds similar to this one.
- Florida’s economic nexus law will go into effect on July 1, 2021.
- Any day now, the governor of Missouri is expected to sign their economic bill into law.
Enforcement for marketplace facilitators
According to an article written by Bloomberg Tax, more and more online merchants operating in the U.S. are collecting sales tax from customers due to Wayfair laws passed by states in accordance to the Wayfair decision. And it is fairly well known that some states, like California and Pennsylvania, are known for being aggressive when collecting tax from online retailers.
The article also says, “Every state has used soft approaches to boost registrations in the state they are doing business in in this post-Wayfair world. Some states have had success with voluntary disclosure programs. Other states are being more aggressive to get their share of their revenue. For example, Arizona is utilizing a third-party company to help them track down companies who are not paying sales tax.”
Still Confused?
Are you a company that is filing in states where you have physical presence and think that is enough? Many companies (even three 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 well.
As previously 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) for further guidance on their economic nexus legislation. We are here to help with all of your multistate tax needs. Call us today!
