2020 sales tax changes: Midyear update
2: South Dakota v. Wayfair and economic nexus laws
Two years ago, on June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. It was a pivotal decision for sales tax, states, and businesses.
Here’s a recap: The Wayfair decision overruled a long-standing physical presence rule that, according to the majority, treated “economically identical actors differently for arbitrary reasons.” For example, a business with just a few items of inventory in a small warehouse in a state was obligated to collect and remit that state’s sales tax on all its sales, while an internet seller with a “pervasive” presence couldn’t be required to collect tax on similar sales.
South Dakota v. Wayfair, Inc. allows states to enforce economic nexus, meaning they can require out-of-state sellers with a certain amount of sales in the state to collect and remit sales tax.
Because of the Wayfair decision, states can now enforce economic nexus, basing a sales tax collection obligation solely on a remote seller’s economic activity in a state — sales or transaction volume. Within days of the decision, three states started enforcing economic nexus laws modeled on the South Dakota law allowed to stand by the court.
Economic nexus two years after South Dakota v. Wayfair
One state after another adopted economic nexus over the past two years, and as of June 2020, 42 states and Washington, D.C., enforce it. Louisiana, one of the first states to enact economic nexus, will at last enforce it starting July 1, 2020.
There’s even economic nexus in Alaska. Although there’s no statewide sales tax in The Last Frontier, roughly 100 local governments levy local sales tax. A growing number of these now require remote retailers with economic nexus in Alaska (based on statewide sales) to collect and remit local sales tax.
Despite all this state activity, many retailers remain unaware of the Wayfair ruling and its possible impact on their business. As a result, they’re at risk of being out of compliance.
The stragglers: Florida and Missouri
High hurdles stand between Florida and Missouri and economic nexus. Many lawmakers in Florida are opposed to adopting anything that could be construed as a new tax. Missouri has a complicated sales tax system that would make compliance extremely challenging for remote vendors.
Nonetheless, there’s strong support for economic nexus legislation in both states, among lawmakers and especially among brick-and-mortar retailers, who see it as necessary for leveling the playing field.
The COVID-19 pandemic could be what these holdouts need to get economic nexus across the finish line: Both states are now dealing with unexpected deficits because of the crisis; and Florida is heavily dependent on sales tax revenue. Requiring out-of-state vendors to collect and remit sales tax would bring them both sorely needed revenue.
As Florida and Missouri grapple with whether to adopt economic nexus, other states are refining existing economic nexus laws.
The evolution of economic nexus
Several states have already altered their economic nexus laws. In 2019, California, Colorado, Iowa, North Dakota, and Washington eliminated their transactions threshold, so that economic nexus in those states is now based on a remote seller’s sales volume alone. Several states changed the sales threshold: California and New York increased it to $500,000; Georgia lowered it to $100,000.
Not all economic nexus laws are fully baked. Some states are still refining them, eliminating transaction thresholds, altering sales thresholds, and simplifying sourcing rules.
That trend continues in 2020: Wisconsin is looking to eliminate its economic nexus transaction threshold, though the billed failed to pass the first time through. Additionally, the Multistate Tax Commission recommends states base the thresholds on retail sales only, which would eliminate registration requirements for remote wholesalers. State economic nexus thresholds vary considerably, which is difficult for businesses selling into multiple states.
The need to simplify sourcing rules has also been raised. While most states base sales tax on the destination of the sale (the location where the buyer takes possession), some use origin sourcing or a combination of destination sourcing and origin sourcing. Texas, which has extremely complicated sourcing rules, is working to simplify them.
Finally, states could make the sales tax registration process less stressful for remote sellers. Approximately 10 states require remote retailers to register with the tax department as soon as an economic nexus threshold is crossed — as in, before the next invoice is issued. The American Institute of Certified Public Accountants recommends giving remote retailers a 90-day grace period.
The long trail of nexus
California recently clarified its trailing nexus policy, i.e., how long remote retailers with economic nexus in the state must continue to collect and remit sales tax after their sales drop below the economic nexus threshold ($500,000). We now know it’s through the end of any calendar year when sales exceeded the threshold, and through the following calendar year.
Some states have clearly defined trailing nexus policies, but many don’t. Economic nexus thresholds may eventually compel states to address this issue.
Economic nexus beyond sales tax
Alabama, California, Colorado, Connecticut, and New York are among the states that held out-of-state businesses with a certain level of sales in the state liable for state income taxes even prior to Wayfair, as Ohio did for its Commercial Activity Tax (CAT) and Washington with its Business and Occupation (B&O) tax.
Since the decision, an economic nexus standard has been applied to income tax in Hawaii, franchise tax in Texas, and several taxes in Portland, Oregon, and San Francisco. Other states and localities could follow suit, especially those with budgets gutted by COVID-19.
Indeed, the pandemic may have long-term nexus implications for businesses with employees residing across state or city lines. Some states, including Massachusetts and Pennsylvania, said they’ll temporarily waive enforcement of certain nexus laws for employees temporarily working from home because of COVID-19. They also made clear such leniency wouldn’t be extended once stay-at-home orders are lifted.
On the other hand, New York Governor Andrew Cuomo announced that residents of other states temporarily working in New York due to the crisis will be liable for New York state income tax.
No matter what happens with this pandemic — whether there are multiple waves as some experts anticipate — more people are likely to spend more time working from home in the months and years ahead. In a recent Gartner survey, 74% of respondents said they intend to keep a portion of their workforce remote after the threat of COVID-19 passes. Sooner or later, this will likely have tax implications.