Sales Tax Economic Nexus
Since the case South Dakota v. Wayfair, Inc. (“Wayfair”) in 2018 that the U.S. Supreme Court overruled the physical presence requirement on sales tax, as a result, most states have implemented economic nexus and required out-of-state companies to collect sales tax in another state.
State jurisdictions have been instituting economic nexus thresholds, and these thresholds vary from state to state. For example, Arizona has sales thresholds of $200,000 for 2019, $150,000 for 2020, and $100,000 for 2021 and thereafter (Ariz. Rev. Stat. §42-5043). California has a sales threshold of $500,000 (Cal. Rev. & Tax. Code §6203). Georgia has a sales threshold of $100,000 or 200 separate retail sales transactions of tangible personal property (Ga. Code. Ann §48-8-2(8)(M.1)-(M.2)).
To identify whether a business might have a sales tax collection and reporting obligation, the states might send a nexus questionnaire to business owners asking them to fill out. The states will then make an assessment and determine whether the business meets the nexus requirement based on the provided information. Therefore, a careful response to the state inquiries is critical to mitigating exposure. It is recommended for businesses to proactively analyze their economic nexus position, register with the states they have business activities in, and begin to collect and report out-of-state sales taxes as applicable.
As a result of the Supreme Court’s ruling in 2018, most states have taken the position to apply economic nexus prospectively. In contrast, Florida has taken the position to apply retroactively. Florida has proposed economic nexus legislation, but it has not been passed. Although Florida did not yet have economic nexus provision in place, it is foreseeable that Florida will pass the legislation in near future. Therefore, out-of-state businesses that have sales in Florida should be prepared.
While the Wayfair case reversed over 50 years of precedent and only impacted sales taxes, business income taxes are currently still protected under Public Law 86-272 (“P.L. 86-272”), which was enacted in 1959. With today’s cloud technology, companies can conduct sales activities differently from those of 60 years ago. As business activities change, it is likely that tax laws would also be updated to adopt to the changes. The successful ruling in the Wayfair case to remove physical presence on sales of tangible personal properties could be the triggering event for the states to aggressively work toward removing physical presence requirement for income tax nexus as well. In fact, several states have begun to send income nexus questionnaire to some of our clients after they filed sales tax. For now, we have been successful defending our clients from further income tax nexus, we want all our clients to be aware of the higher risk of income tax nexus as well. If you are contacted by state tax authorities, please contact us immediately. Unfortunately, tax cases worsen if you take no actions. It will help you if you take actions swiftly.