South Dakota v. Wayfair Inc. has led to the largest change in sales tax in the last 50 years. Since 1967, businesses have operated under the premise that a substantial physical presence is needed in a state, in order for said state to subject the business to their sales tax collection and remittance requirements.
”Substantial physical presence” has always raised questions as to what that really means. Is one meeting by a sales rep with a prospect substantial? Maybe. What about exhibiting at trade shows? Maybe – depending on the state. Over the last roughly five to 10 years, states have taken aggressive positions as to what substantial physical presence means -- in some cases, even noting that web-based “cookies” that are used in browsers create substantial physical presence.
With Wayfair, the initial hope was that nexus would be simplified -- defining nexus as a certain amount of sales and/or a certain number of transactions. This has been described as economic nexus. However, in looking at economic nexus rules from state to state, many are different. The dollar threshold of sales can differ, whether taxable sales or all sales are considered, whether sales in the previous calendar year or last 12 months are counted, and many other variables as well.
One of the great misconceptions is that economic nexus replaces physical nexus. In fact, economic nexus does not replace physical nexus – it’s additive. Rather than simplifying the nexus debate, businesses must not only consider whether they have a physical presence, but now they must also look at the complicated economic nexus rules from state to state.
Additionally, these economic nexus rules are constantly in flux. Since the Supreme Court's Wayfair ruling in June 2018, over 30 states have introduced some type of economic nexus rule. We have seen multiple states come into the fold each month since the Wayfair ruling was first handed down.
What does this mean to your clients?
This is not just an internet retailer phenomenon. That is the focus, but a host of other businesses are being pulled into this. The economic nexus rules are targeting businesses that don’t have physical presence in a particular state. So a traditional business that may not have any internet presence can easily be swept up in this if their sales activity and transaction volume is sufficient enough.
Most of the thresholds are $100,000 or 200 transactions, but some states like Pennsylvania and Washington have a $10,000 threshold, while states like Alabama, Connecticut, Georgia, and Mississippi have $250,000 thresholds.
A thorough review of all sales activities, including transaction volumes, as well as potential physical nexus-creating activities should be looked at for each client. However, not every client will be willing to pay the fees associated with this deep dive. At the very least, a quick review of your clients’ sales activities is essential. If you do nothing else, review the last 12 months of sales activities and see if any states have more than $100,000 in sales. While this is not a 100 percent accurate method, it’s a first guide that would suggest a deeper dive into that specific state to determine if the economic nexus thresholds have been crossed.
If you determine that a client has economic nexus, then you should consider whether that client has taxable sales in the state. For example, your client may provide a non-taxable service. They could have nexus for sales tax purposes, but because they provide a non-taxable service and thus have no sales tax liability, there may not be a need to register with that state. On the flip side, if they are selling tangible personal property, then they will want to register and collect the sales tax due.
If you need further information about economic nexus, there are a number of guides available online that outline the different thresholds from state to state. Additionally, some of the major research tools like Checkpoint and BNA have downloadable charts. You can also speak with a CPA with a concentration in sales tax or other sales tax expert who deals with the ambiguities on a daily basis.
