Is Your Business in Compliance?
One U.S. Supreme Court decision completely shook the landscape for sales tax collection for all types of businesses and industries throughout the world. Now it is up to business owners to understand the new rules of the road and to become compliant with each state’s requirements.
The 2018 South Dakota v. Wayfair Supreme Court case significantly lowered the physical presence nexus threshold for state and local taxes (SALT) collection, giving states the right to implement economic nexus legislation for remote sellers. While Florida is one of only two states to not implement legislation, every business owner, including owners of Florida-based companies, must have a full understanding of sales tax filing requirements if they conduct business across state borders.
In its Wayfair decision, the U.S. Supreme Court overturned physical nexus standards that had been in place for more than 50 years. These standards prevented states from requiring out-of-state businesses to collect sales tax on goods that were shipped to states in which the company lacked a physical connection to a state. In its decision, the high court determined that physical presence is no longer necessary for collecting out-of-state sales tax. Rather, a state can now require an out-of-state company to collect sales tax if its revenue and/or number of transactions reached a certain threshold.
States Rule on Substantial Nexus
The Wayfair ruling has opened the gates for states to enact economic standards similar to South Dakota’s, which requires out-of-state businesses to collect its state sales tax. Nearly every state with sales tax has implemented economic nexus legislation for remote sellers. Many states are following the Wayfair standard, which means that a seller with more than $100,000 in gross receipts or at least 200 transactions in the calendar year has substantial nexus. Such sellers must have a sales tax license, collect taxes, file returns and remit tax. Looking ahead, many states will be using revenue rather than number of transactions to determine thresholds for economic nexus.
Many states are also taking aim at marketplace facilitators. Retailers that sell on the internet through a marketplace facilitator will need to comply with the new requirements—but increasingly states are shifting this compliance burden. Close to 30 states have enacted marketplace facilitator legislation, requiring companies like Amazon to collect and remit sales tax for sales made on their platform.
Small Business Remote Sellers Seek Protection
The elimination of the physical presence rule can impose a substantial burden on small and medium-size sellers. Through their trade groups, small businesses have voiced concern about the burden they will endure if they are subject to the same substantial nexus rules. Accordingly, legislation was recently introduced in Congress to protect small business remote sellers with less than $10 million in annual gross receipts from such collection requirements when they lack a physical presence. Daszkal Bolton will monitor this legislation as it moves through congressional committees.
Next Up: Income Tax Nexus
To make matters even more interesting, some states, such as Texas, are proposing rules to extend sales tax economic nexus to income/franchise taxes, applying similar economic nexus standards as discussed above. In fact, Hawaii has already enacted economic income tax nexus rules. Stay tuned as more states follow Hawaii and now Texas’ lead.
It is important to understand that economic nexus does not replace physical nexus—both must be considered when determining SALT obligations. The physical presence test can still be met in absence of economic nexus.
If your wholesale, retail or service business sells across state lines, the new nexus laws apply to you. Additionally, global companies must consider sales tax registration in the U.S., even though they have no footprint.
How should your business define a transaction in this post-Wayfair world? What sales are considered in making the threshold determination? How do local taxes figure into the equation?
Complying with each state’s nexus laws can be complicated. Daszkal Bolton’s State and Local Tax Team is available to help guide you through multistate tax issues and to help you comply with new sales tax requirements resulting from the Wayfair decision. For more information, contact Faith Gorman, Director of the State and Local Tax Practice at Daszkal Bolton, at 561.886.5286 or email Faith.