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Economic Presence vs. Physical Presence for Nexus

  • Jun 26, 2016 | Suzanne Kearns

Many states are experiencing financial problems due to a loss of sales tax revenue. The issue stems from an increase in online sales and a decrease in business at brick-and-mortar stores.

In fact, the National Conference of State Legislatures (NCSL) reports that in 2015, 22 states had sales tax revenues that were below target revenues or estimates. And the all-important sales tax accounted for 31.2 to 50 percent of state tax collections in 2014. So, what are states to do?

Challenge the US Supreme Court decision known as Quill vs. North Dakota, that’s what.

Can You Have Nexus Without Physical Presence?

According to Quill, out-of-state sellers must have a physical connection to a state before they are required to collect and remit sales tax for that state. The most common nexus triggers are having a physical location in the state such as a store, warehouse, or office, having an employee or representative solicit business in the state, or having a link to an in-state affiliate.

But as sales tax revenues go down, states are becoming bold in their attempts to push the boundaries outlined in Quill. And one of the most recent attempts is to link out-of-state sellers to a state by economic means rather than a physical presence.

How Are States Approaching Quill?

For example, if you are considered a vendor by Vermont guidelines, you automatically have nexus in the state, even if you have no physical connection. Instead, the state relies on economic presence to justify the connection. If you solicit business in the state for sales of personal tangible property and exceed $50,000 in the 12-month period prior to the quarterly or yearly sales tax filing periods, you have nexus in Vermont. Period. In other words, the state completely ignores Quill’s guidelines when it comes to nexus.

Alabama is another state challenging the boundaries set by Quill in this way. In January of 2016, the state passed a regulation that requires out-of-state sellers to collect and remit sales tax if they sell more than $250,000 per year, based on the previous calendar year’s sales, and meet one of the regulations outlined in Alabama code section 40-23-68. Some of the requirements in the code are the standard physical nexus triggers such as physical locations or employees, but it also includes advertising to residents of the state.

Will Quill Be Overturned?

So, will the requirement of physical nexus soon be a thing of the past? According to an article by State and Local Tax Services, these new regulations may indeed offer a challenge to Quill. And according to a document issued by the Vermont government, that’s exactly what states intend to do. Specifically, the document, when listing approaches in other states, says that the goal is to pass a law that will trigger a lawsuit, and then pass language preparing for Quill to be overturned.

The bottom line? It’s more important than ever to stay up-to-date on the latest news and laws concerning nexus. Be sure to read our blog regularly so you’ll be the first to know as more states begin to rely on economic presence and bring the current laws into question.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns