By: Karen T. Syrylo, CPA
September 25, 2018
And so, the rush is on – for the states to provide details of their “economic nexus” threshold requirements for sales tax, and for businesses to determine their obligations and begin compliance with collecting sales tax. Because of the Supreme Court’s June 21, 2018 ruling in South Dakota v. Wayfair, in which the Court overturned its prior decision in Quill and ruled that a physical presence nexus test is not a proper interpretation of Commerce Clause restrictions, many businesses now face sales tax collection responsibilities in multiple states for which they previously had no such requirement. We’ve been keeping track of the states’ pronouncements and present in this article some of the variations and issues as well as a list of the states’ activity to date.
Variations, Issues, Questions
Quite a handful of states had enacted “economic nexus” statutes prior to the Wayfair decision (see list below); those states have been reviewing their laws and evaluating how to apply them and whether or not they need changes. Some states are considering the need for new legislation. Other states that had no specific economic nexus statutes have recently released regulations or other administrative pronouncements (see second list below) that require an economic nexus approach, for example under perceived general statutory authority that their tax is to be administered “to the fullest extent allowed under the U.S. Constitution.”
Some observations and questions arise when looking at these many laws and rules, for example:
- The sales dollar thresholds that create nexus vary from state to state and from the South Dakota law that was considered by the Supreme Court in Wayfair ($100,000 in-state revenues or 200 in-state transactions); in fact, several states’ thresholds are significantly less at $10,000.
- The dates a remote seller must begin collecting sales tax vary from state to state.
- While the Supreme Court specifically noted its approval that the South Dakota law was not retroactive, some states are using retroactive dates for the measurement period for determining whether nexus existed.
- Not all states explain how a business is to handle the situation in which its nexus with the state exists in some years and not in others.
The dollar thresholds — One of the aspects of the South Dakota statute that met with approval of the Supreme Court was the small business exclusion, i.e., that a business having less than $100,000 in-state sales revenue and 200 in-state transactions would not have nexus for sales tax collection responsibilities. Although the Court voiced approval of the South Dakota threshold, the Justices did not state that these were the required threshold amounts. However, because the Court was clearly concerned about not placing too much administrative and cost burdens on small businesses, it is logical to expect that someone will challenge the $10,000 sales threshold, currently contained in the statutes of Oklahoma, Pennsylvania, and Washington, as unconstitutionally burdensome on a business of that size.
Additionally, the mere fact that the dollar thresholds vary from state to state — $10,000, $100,000, $250,000, $500,000 – adds another point of complexity to the already complex sales tax compliance world. This may be a topic that is ripe for Congress’s action.
What is retroactivity? – Another aspect of the South Dakota law that met with the Supreme Court’s approval was that the law was specifically written to not be retroactive. In reviewing the states’ pronouncements to date, a reader can see a question about what retroactivity would offend the Court, in two aspects.
1) Retroactive nexus measurement, even though prospective tax collection responsibility: Several states, see for example Illinois and Michigan, are requiring that vendors do a retroactive analysis of sales made in years 2017 and 2018 to determine whether they have met the dollar threshold or transaction threshold during that period; if so, the tax collection responsibility begins with sales as of October 1, 2018. Compare this to Maryland’s recently issued Tax Alert, which says that “Beginning October 1, 2018, out-of-state vendors should begin to track gross revenues and sales delivered into Maryland to determine if either of the above criteria is met [$100,000 or 2000 transactions]. This tracking requirement does not apply to sales delivered into Maryland prior to October 1, 2018.” Maryland’s requirement to charge sales tax begins at a future date after one of the criteria is met. For businesses that have not had prior sales tax collection responsibilities and did not track their sales by state and may have to recreate these records, one wonders whether the retroactive tracking requirement, such as in Illinois, Michigan and others, will be deemed an unconstitutional undue burden.
2) Fears of outright retroactivity: These exist in several ways. a) Chairman Goodlatte, in the Judiciary Committee hearing of 7/24/18, said: “Retroactive taxation remains a real threat. Already, six state jurisdictions have laws on the books with effective dates that look back as much as two years.” b) In Florida, the state’s attorney general recently wrote in a brief for a pending case involving nexus for the state’s tobacco excise tax (Global Hookah Distributors, Inc.) that “Wayfair controls the outcome of this matter, and there is no reason that case should not be applied retrospectively as well as prospectively.” However, neither the Florida legislature nor Department of Revenue has yet issued formal guidance on the state’s official position regarding the timing of implementing an economic nexus standard for all vendors, and we hope that their position will be to avoid retroactivity. c) Additionally, the Massachusetts Department of Revenue in its Technical Information Release TIR 18-8, dated 9/17/2018, announced that the Department “is enforcing the Regulation (830 CMR 64H.1.7(3)) for all tax periods after the Regulation’s effective date (October 1, 2017) both prior to and subsequent to Wayfair. A significant number of vendors complied with the Regulation as of the October 1, 2017 effective date, or shortly thereafter, and continue to collect and remit sales or use tax. A vendor that is subject to tax under the Regulation that has not registered to collect sales and use tax should do so.” (Query: Immediately? As of what date? For what period of sales? Note that a business group is challenging the Massachusetts regulation in a Virginia court proceeding.) While most states’ announced rules are staying away from outright retroactivity, the fact that it can be contemplated is a great concern.
Nexus for some years, not for others – This is surely to be an issue for many businesses with the smaller levels of annual gross receipts: that the locations of their customers vary from year to year, resulting in meeting the nexus thresholds in some years and not in other years. A few states have provided the details of what these businesses should do. For example, Maryland’s Tax Alert specifies, complete with an accompanying example, that “Out-of-state vendors not meeting the criteria for the previous or current calendar year will no longer have an economic nexus with Maryland and may discontinue collecting Maryland sales tax.” The example’s translation is: If the nexus criteria is met during the period 10/1/2018 through 12/31/2018, tax collection is required for all of calendar year 2019; then if nexus criteria is not met for the year 2019 (even though tax must continue to be charged throughout 2019 based on 2018 nexus) as of 1/1/2020 the vendor no longer has nexus and need not charge Maryland tax beginning 1/1/2020; but the vendor must continue to track Maryland sales to determine whether nexus is reestablished by again fulfilling the criteria in 2020 or later years. We hope that all states will provide specific direction in this regard.
Information available from the states so far
We’ve been tracking the existing statutes and administrative announcements and list them below. In reading through the variations, one wonders whether the states will get together, for example through the Streamlined Sales Tax Project, to bring uniformity to the threshold requirements and filing processes. There are currently 23 states participating in the Streamlined Project, and so that leaves 23 more sales tax states that aren’t; hopefully more states will soon participate.
Or, will Congress take action, either to put further restrictions on the states, or to at least mandate some uniform nationwide provisions? (Read about some Congressional actions to date in our companion article “U.S. Congress Proposes Actions Post-Wayfair.”)
Altus Group will be monitoring these and other developments and will continue our reporting.
States with existing economic nexus laws
- Alabama (Jan. 1, 2016), $250,000 in in-state sales
- Connecticut (July 1, 2018), 200 transactions and $250,000 in in-state sales
- Georgia (Jan. 1, 2019), 200 transactions or $250,000 in in-state sales
- Hawaii (July 1, 2018) 200 transactions or $100,000 in in-state sales
- Illinois (Oct. 1, 2018) 200 transactions or $100,000 in in-state sales
- Indiana (July 1, 2017) 200 transactions or $100,000 in in-state sales
- Iowa (Jan. 1, 2019) 200 transactions or $100,000 in in-state sales
- Kentucky (July 1, 2018) 200 transactions or $100,000 in in-state sales
- Louisiana (contingent on Wayfair ruling) 200 transactions or $100,000 in in-state sales
- Maine (Oct. 1, 2017) 200 transactions or $100,000 in in-state sales
- Minnesota (contingent on Wayfair ruling) 100 transactions or $100,000 in in-state sales in at least 10 transactions
- Mississippi (Dec. 1, 2017) $250,000 in in-state sales
- North Dakota (contingent on Wayfair ruling) 200 transactions or $100,000 in in-state sales
- Oklahoma (July 1, 2018) $10,000 in in-state sales [Query: will $10,000 withstand challenge post Wayfair Court’s approval of South Dakota?]
- Pennsylvania (March 1, 2018) $10,000 in in-state sales
- Rhode Island (Aug. 17, 2017) 200 transactions or $100,000 in in-state sales
- South Dakota (contingent on S.D. Sup. Ct. approval, following remand) 200 transactions or $100,000 in in-state sales
- Tennessee (Currently on hold due to litigation) $500,000 in in-state sales
- Vermont (contingent on Wayfair ruling, July 1, 2017) 200 transactions or $100,000 in in-state sales
- Washington (July 1, 2017) $10,000 in in-state sales
- Wyoming (July 1, 2017) 200 transactions or $100,000 in in-state sales
States that have issued administrative guidance
- Maryland: Emergency regulations approved, nexus is created by $100,000 of in-state revenues or 200 transactions; effective 10/1/18 and not retroactive (note MD is not a “Streamlined” state)
- Arkansas: Dept Finance + Administration task force proposal – $100,000 or 200 transactions
- California: Proposed legislation is in draft – $500,000
- Colorado: Emergency regulation 9/12/2018 — $100,000 or 200 transactions
- Idaho: Proposed legislation HB578 for click-through nexus
- Massachusetts: Dept announcement- Regulation 830 CMR 64H.1.7 Remains in Effect
- Michigan: Revenue Administration Bulleting 2018-16 – $100,000 or 200 transactions, effective 10/1/2018
- Nebraska: Dept statement released 7/27/2018 – $100,000 or 200 transactions, effective 1/1/2019
- Nevada: Proposed regulation, $100,000 or 200 transactions
- New Hampshire: Has no sales tax; proposed legislation would prevent other states’ tax collection by New Hampshire businesses
- New Jersey: AB4261 passed but vetoed by governor for administrative amendments to be made; $100,000 or 200 transactions.
- North Carolina: Dept Directive SD-18-6, $100,000 or 200 transactions, effective 11/1/208
- Ohio: statement issued 6/21/2018 – statute must be changed
- South Carolina: Dept draft revenue ruling 8/10/2018 – $250,000
- Tennessee: Dept notice August 2018 – Dept will not enforce economic nexus, due to statute requiring legislative review
- Texas: Dept Tax Policy News July 2018 – physical presence rule still in place until legislative and regulatory actions
- Utah: Proposed legislation SB2001 – $100,000 or 200 transactions
- Wisconsin: Remote sellers information on website – $100,000 or 200 transactions, effective 10/1/2018