TAX

Reminder: Sales Tax Landscape Continues to Change

28 June 2019

Ryan J. McDonell, CPA

What Has Changed?

Sales tax nexus is the minimum amount of interaction with a state requiring a business to collect and remit sales tax.  Put more simply, if a business establishes sales tax nexus with a state, it must pay sales tax on its sales. In the same way that states vary in which transactions are considered taxable or nontaxable, states also have different nexus requirements.

The 2018 landmark court case, South Dakota v. Wayfair, Inc., significantly changed how states approach sales tax nexus. Prior to the Wayfair decision, states were bound to the physical presence requirement established by former court cases, Bellas Hess and Quill. Physical presence, as the name suggests, required a business to be physically present – for example – an office building, warehouse, or employees located in the state.  Over the last decade, states began to more aggressively assert physical presence nexus standards in response to the growing e-commerce sector of the economy. Massachusetts, for example, found that “cookies” from websites stored on customers’ computers in-state were enough to establish physical presence.

In South Dakota v. Wayfair, the Supreme Court ruled that states may mandate businesses with more than 200 transactions or $100,000 of in-state sales to collect and remit sales tax – even when physical presence is absent. Thus, the Supreme Court decision in Wayfair effectively removed the physical presence requirement, allowing states to pursue economic nexus standards to collect more revenue.

Economic nexus standards allow a state to assert nexus based on a dollar and/ or transaction threshold for sales delivered by a business into a state. This means that merely the solicitation of sales over the internet, or otherwise, can give rise to a sales tax collection requirement. Connecticut, for example, asserts nexus on any business that regularly solicits sales, makes 200 or more sales transactions and has $250,000 or more in gross receipts derived from CT. Each state’s economic nexus policy is different – to date, there are over 30 states that have adopted economic nexus policies.

How Does This Affect Me?

The Wayfair decision makes it easier than ever for a state to assert sales tax nexus on a business. While all states’ policies generally revolve around a set number of transactions and gross receipts, the specific threshold for each state varies. Businesses that routinely solicit sales in states where they are not physically located, and historically have not collected sales tax, should review the states’ economic nexus policies to make sure the business is in compliance.