It’s been one year since the Supreme Court’s ruling in South Dakota v. Wayfair, a case that broadened states’ sales tax collection authority to include remote sellers — those without an in-state physical presence.
States have been incredibly active in codifying this broader authority during the last year by enacting receipts-based and transaction-based nexus thresholds similar to South Dakota’s. Already, all but two of the 46 states with a retail sales tax have imposed an economic nexus standard during the year since Wayfair.
When a remote seller surpasses a state’s threshold (e.g., $100,000 in gross receipts), the seller has an obligation to collect and remit sales tax in the state. States have already been sending notices to remote sellers enforcing these new rules. States are not slowing enforcement, nor are they offering any grace periods, so the time to act is now.
Considerations before you register with a state
While sellers can typically look at a state’s threshold and determine whether or not they have economic nexus for sales tax purposes (although sometimes it’s more complicated than this, especially for wholesalers), that should just be the first step when deciding how to begin compliance. Businesses should also consider these related issues before registering to collect sales tax in a new state:
- Did the seller previously have physical presence in the state?
- Does the state impose other non-income-based taxes that the seller may have prior period exposure for, such as the Washington B&O (business and occupation) tax?
- Does the state already have economic nexus thresholds for income tax purposes?
- Has the business attended a trade show in the state?
All of the above items may expose a seller to potential nexus issues. Companies should quantify the related exposure and discuss remediation options before deciding what action to take (such as registering prospectively or instead pursuing a voluntary disclosure agreement).
This ultimately becomes a business decision for the seller to make because, when a seller simply registers to start collecting sales tax, any potential voluntary disclosure agreement for past sales tax liability comes off the table in almost every state.
The latest state tax trends
Even before the Wayfair decision, states were planning how to handle this new collection authority. Departments of Revenue were pressured to implement an economic nexus standard, publish clarifying guidance, provide time for sellers to comply, and start collecting.
However, as states implemented and revised their economic nexus rules, several recent trends have emerged:
- States such as California, Washington, and Colorado have removed the transaction count from their thresholds, while other states, such as Arizona, Idaho, and New Mexico, adopted economic laws that do not include a transaction threshold. The concern with retaining transaction thresholds is that it arguably eliminates the “small seller” protection that the typical $100,000 revenue threshold provides. For example, if a remote seller sold 250 bracelets to purchasers in a state, each costing two dollars, it would have economic nexus in the state under a typical transaction threshold even though its’ in-state gross revenue was only $500, far below most states’ $100,000 revenue threshold.
- Texas, Louisiana, and Alabama, which impose many local sales taxes, have begun to offer a simplified sales tax collection method for remote sellers that allows these sellers to charge a single, blended rate for all sales made into their state. This greatly helps sellers who have not implemented sales tax collection software and must manually enter each local rate based on the locality that an item is shipped into.
- Pennsylvania, Connecticut, and Illinois have included language in legislation authorizing the state to work with Certified Service Providers (CSPs) to offer free or discounted sales tax collection software to remote sellers. Pennsylvania has already contracted with several CSPs to allow remote sellers to utilize their service (which collects the appropriate sales tax and remits it to the state) for free.
Two states to go
Of the 46 states (including the District of Columbia) that impose a retail sales tax, only two — Florida and Missouri — do not yet have economic nexus thresholds similar to South Dakota’s. Most states’ Wayfair laws have been in place for many months and have been widely enforced, with Oklahoma and Kansas being the most recent adopters of these laws.
On May 16, Oklahoma replaced its historical option to either submit use tax reports or collect sales tax with a mandatory sales tax collection requirement. The rule is applicable beginning November 1, 2019 to any remote seller who has made at least $100,000 of gross sales to Oklahoma purchasers for the current or preceding calendar year. On August 1, Kansas announced its enforcement of a Wayfair economic nexus law and became the first state to use a nexus standard that lacks either a receipts-based or transaction-based threshold, a move that many suspect will be challenged if widely enforced over small sellers.
Wayfair’s effect on income, franchise, and gross receipts tax
Although Wayfair was about sales tax collection requirements, we will likely see increased enforcement of economic nexus for other state and local tax types including income tax, franchise tax, and gross receipts tax.
States currently impose economic nexus for other tax types in two ways: broad economic nexus, and bright-line or “factor presence” economic nexus.
- Broad economic nexus refers to states that have general nexus statutes with no thresholds, such as those that assert nexus “to the full extent of the U.S. Constitution” or over companies who make any sales to in-state customers.
- Bright-line economic nexus refers to states that have thresholds, which, when exceeded, create nexus for the company. These states typically use receipts-based thresholds that are higher than the $100,000 amounts used under a typical sales tax economic nexus law (generally around $500,000). Bright-line economic nexus is similar to Wayfair thresholds for sales tax, but is imposed on tax types like income and franchise tax.
In the past, states have not been overly aggressive in enforcing broad economic nexus statutes, and fewer than ten states have historically imposed bright-line economic nexus. However, after Wayfair, states feel more confident that economic nexus for other tax types would be upheld if challenged in court. This has led more states and cities to enact economic nexus laws for other tax types, and to become more assertive when enforcing or enacting “broad” economic nexus laws. For example:
- Effective for tax years beginning on or after Jan. 1, 2019, Philadelphia and San Francisco will begin imposing bright-line economic nexus for their local gross receipts taxes.
- During 2019, Indiana, Kentucky, and Utah either enacted new broad economic nexus standards for corporate income tax purposes, or announced more aggressive enforcement of their existing broad economic nexus laws.
- In July, Hawaii's legislature enacted a statute that, effective for tax years beginning after December 31, 2019, imposes bright-line economic nexus for corporate income tax purposes on corporations who exceed the state’s sales tax economic nexus threshold.
- Texas has recently issued draft proposed amendments to its franchise tax regulations, which would adopt a $500,000 economic nexus standard for purposes of that tax, effective for reports due on or after January 1, 2020.
Because of this increased imposition of economic nexus for other tax types, companies should carefully evaluate potential obligations for income tax and other tax types before registering to collect a state’s sales tax.
Marketplace provider laws
Marketplace provider collection is another major effect of Wayfair that states have quickly pursued. These laws require marketplace providers to collect sales tax on behalf of sellers who use their marketplace to facilitate sales. They were aimed at large marketplaces like Amazon, eBay, and Etsy, who are not necessarily the retailers (owners) of the products sold on their websites, and may instead merely provide the marketplace/web platform through which a retailer sells the product.
Marketplace provider laws generally relieve retailers of the liability to collect sales tax on sales made through the marketplace by shifting the primary collection obligation to the marketplace operator. However, for any sales made by a retailer outside of a third-party marketplace — via the retailer’s own website, for example — the sales tax collection liability remains with the retailer. Remote sellers who use both a third-party marketplace and other methods to make retail sales need to evaluate their own sales tax collection liabilities for sales made outside the marketplace.
Today thirty states and the District of Columbia have enacted statutes that require marketplace providers to collect sales tax on behalf of retailers who make sales through the marketplace. Only 22 of these 31 jurisdictions currently require marketplace providers to collect and remit sales tax on sales they facilitate. Seven of the remaining nine states will begin enforcement on October 1, 2019, and the other two states will begin on January 1, 2020.
How we can help
If you’re feeling overwhelmed with all the state tax changes, it would be understandable. A Wayfair checkup can help you understand your sales tax exposure from economic nexus, and an historical nexus study can help guide the direction of your compliance decisions with respect to your overall state tax footprint (including both sales tax and other state and local taxes). For some companies, outsourcing your sales tax compliance obligations may allow you to refocus your time on value-added activity. Wherever you are on this journey, CLA’s state and local tax professionals are on top of these shifting state tax rules. We can help guide you through this analysis.