UNITED STATES - Beware - Sales tax economic nexus thresholds are not uniform
As discussed in the October 2018 issue of Indirect Tax News, on 21 June 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). The Wayfair decision overturned the physical presence standard of Quill Corp. v. North Dakota, 504 U.S. 298 (1992) as a requirement for sales tax nexus. In reaction to Wayfair, about 40 states adopted a sales tax economic nexus standard similar to South Dakota’s USD 100,000 of sales or 200 transactions at issue in Wayfair. On their face, these laws appear to be straightforward but, as we will explain, the various states’ sales tax economic nexus rules adopted are not uniform or intuitive. Some of the key differences among states’ economic nexus standards include:
- The enforcement date,
- The sales and/or transaction threshold applied,
- Whether the threshold contemplates total sales or retail sales,
- The measurement period of the threshold, and
- Whether the state requires meeting criteria in addition to the threshold.
Most of the early adopters of sales tax economic nexus rules delayed the actual enforcement of the law. For example, Indiana made its law effective 1 July 2017. South Dakota’s law went into effect 21 June 2018, and Kentucky’s law did the same on 1 July 2018. But enforcement of each of these states’ laws was postponed until 1 October 2018. Thus, a remote vendor should be mindful of the actual state’s economic nexus enforcement date or risk prematurely subjecting itself to the consequences associated with sales tax collection (for example, the cost of audit and the assessment of tax, interest, and penalties).
On the other hand, some states (for example, New York) adopted enforcement dates that precede the decision in Wayfair. However, there remains uncertainty whether any state may lawfully apply economic nexus for periods prior to the 21 June 2018 Wayfair decision. For example, in its decision, the Court in Wayfair noted that South Dakota’s tax system includes several features that appear designed to prevent unconstitutional application, including prospective-only enforcement. So, it is questionable whether state enforcement of a sales tax economic nexus standard with respect to a period pre-dating Wayfair would survive a constitutional challenge.
States like Arizona, Florida, Idaho, Kansas, Missouri, New Mexico, and Virginia appear to have not enacted a law with a sales tax economic nexus standard. But, there is a question as to whether some of these states are even required to enact one, due to potentially broad language in their existing statutes. For example, Nebraska, Pennsylvania, and West Virginia relied on the broad language of their statutes to adopt a sales tax economic nexus threshold simply by issuing a bulletin or similar notification to taxpayers.
Economic nexus thresholds
The most obvious disparities among sales tax economic nexus thresholds adopted by the states are the dollar and transactional volume of sales thresholds and the use of an “or” versus an “and” test. For example, the threshold adopted by Ohio is USD 500,000 with no specified transactional volume threshold; the threshold adopted by Connecticut is USD 250,000 and 200 transactions; and the threshold adopted by Illinois is USD 100,000 or 200 transactions.
Taking an even closer look at the language under sales tax economic nexus standards reveal even more dissimilarities. For example, the standard adopted by Georgia applies where the remote vendor generates USD 250,000 or more in gross revenue from retail sales of tangible personal property, a term that does not include sales for resale (or services), in the previous or current year or 200 or more separate retail sales of tangible personal property in the previous or current year.
By comparison, Rhode Island adopted an economic nexus threshold that applies to the preceding calendar year only, and where the remote vendor had gross revenue from the sale of tangible personal property and/or has taxable services delivered into the state equal to or exceeding USD 100,000 or 200 or more separate transactions from such sales. Rhode Island measures all sales of tangible personal property, sales of taxable services, including sales for resale, and limits the analysis to sales activity in the previous calendar year.
In states that use the number of transactions when determining sales tax economic nexus, a remote vendor should pay close attention to how the state accounts for transactions. For example, Wisconsin provided guidance that each invoice is considered a transaction and that, in the case of sales, leases, and licenses, each periodic payment is a separate sale transaction, but a deposit made in advance of a sale is not a transaction.
Additional limiting criteria
Some states also require meeting certain criteria in addition to the dollar volume and/or transactional volume criteria prior to establishing nexus with the state. For example in Alabama, nexus may be established where sales into the state exceed USD 250,000 but the remote vendor must also engage in some other activity, such as soliciting orders in the state by advertising directed at consumers located in the state via a contract with a broadcaster, cable television operator, or publisher located in the state or through mail.
As shown, application of sales tax economic nexus standards will require paying close attention to the differences in states’ laws. Failure to do so may result in premature registration for sales tax collection by a remote vendor and the attendant costs of compliance, such as the cost of filing returns, audits, professional fees, and so on.
Regardless of when a remote vendor registers for sales tax collection, before doing so, they should assess whether they have any historical exposures as they relate to other taxes, such as income taxes and gross receipts taxes. This is particularly important because physical presence nexus, which still applies in a post-Wayfair world, may be established via in-state non-employee representatives acting on a remote vendor’s behalf. In addition, some states have adopted economic nexus thresholds for income tax purposes (and gross receipts tax purposes, too), which may also ensnare a remote vendor, and U.S. tax treaties that may otherwise exempt the remote vendor from U.S. federal income tax typically do not apply to state income taxes. If a remote vendor is exposed to other types of taxes, they risk being subject to interest and penalties without remediation, if not addressed early on.