Tomorrow marks one year since the U.S. Supreme Court’s ruling in South Dakota v. Wayfair, which sparked a dramatic expansion in the sales tax compliance landscape for ecommerce companies and remote or online sellers. The decision, on June 21, 2018, eradicated the primacy of the “physical presence” standard and made it clear that states have the right to charge taxes on purchases from out-of-state sellers based solely on the scope of their economic presence. As a result, there has been a flurry of activity as states enact and begin to enforce these new sales tax requirements.
Defining Economic Nexus
In Wayfair, the Supreme Court said the Quill v. North Dakota decision, which held that states can only impose sales tax requirements on sellers physically located within their borders, was wrongly decided and that states were free to require tax collection from remote sellers so long as those requirements did not represent an undue burden on interstate commerce. Apart from detailing how South Dakota’s economic nexus threshold of 200 transactions or $100,000 in sales, when evaluated in light of their relatively simple sales tax rules and their membership in the Streamlined Sales Tax Governing Board, seems not to be unduly burdensome, the Court did not provide much guidance as to what sort of economic connections a seller needs to have with a state to justify a tax collection requirement. Nonetheless, states immediately went to work and began crafting their own rules.
Tracking Economic Nexus
The economic nexus floodgates opened wide in October 2018, when 12 states went live with new rules. And the surge continues. Today, at least 43 states now have economic nexus laws on the books. And five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not currently collect any state-level sales tax, so online retailers do not have to worry about them…yet.
The most recent states to begin collecting tax on remote commerce are some of the most challenging:
- Colorado: While enacting a requirement back in December, Colorado extended a grace period, which expired on June 1, allowing taxpayers to get their compliance ducks in a row. Today, sellers with $100,000 of gross sales in Colorado are required to collect state tax, county tax and any tax due in state-administered cities and districts.
- California: Its requirement became effective April 1, 2019, and as originally announced, it would have applied to any remote seller with $100,000 in sales or 200 transactions in California. Further, a seller’s obligation to collect district-level sales tax would have been determined on a district-by-district basis. However, a recently passed bill retroactively changed the standard to be far more simple. Sellers must collect California tax (districts included) if they have more than $500,000 in California sales.
- Tennessee: While Tennessee has had an economic nexus standard on the books for quite some time, it recently announced a plan to begin enforcement as of August 1, based on a $500,000 threshold.
- Arizona: A recently passed bill enables Arizona to collect tax from sellers with $200,000 of sales into Arizona (with the threshold decreasing to $100,000 by 2021) starting on October 1, 2019
- Texas: While Texas already has an economic nexus rule slated to go into effect on October 1, 2019, it recently approved a new law allowing remote sellers to collect based on a simplified rate structure.
- New Mexico: HB 6, which was passed a few short weeks ago, enables the New Mexico Department of Revenue to collect tax from remote sellers (based on a $100,000 threshold) effective July 1, 2019.
- Idaho: Back in May, Idaho announced an economic nexus collection rule that becomes effective on July 1 based on a $100,000 threshold.
On top of it all, Arkansas, Pennsylvania, and Virginia all have requirements kicking in as of July 1, 2019.
You may ask, what states don’t have an economic nexus standard on the books? Well, Kansas, Missouri, and Florida don’t have anything official. Louisiana fully plans to announce something and has created a simplified compliance regime for remote sellers, but has yet to pull the trigger and make it mandatory.
Understanding Economic Nexus
Apart from keeping up with the pace of states jumping on the economic nexus bandwagon (which admittedly is close to completion), sellers face a substantial challenge in understanding how to evaluate their obligations on a state-by-state basis. While many states articulated a $100,000 in sales and 200 separate transaction threshold (based on South Dakota’s success before the Court), it’s definitely not universally true.
Several states have foregone the individual transaction test entirely while others have opted for an increased total sales threshold. Further, not every state counts things in the same way. The inclusion (or exclusion) of exempt sales, sales for resale, and marketplace sales vary on a state by state basis. Adding to the confusion, as states begin to gain experience with remote collection, they are refining the rules. For example, Oklahoma recently increased its threshold from $10,000 to $100,000, and in 2020, Georgia will increase its threshold from $100,000 to $250,000. This trend is likely to continue as each state searches for the sweet spot that brings in maximum revenue at a minimal administrative burden.
The Process of Economic Nexus
Once online retailers evaluate their economic nexus footprint and determine where they want and need to collect, the next step is to register in the relevant states. Registration can be a challenging task, as some states ask complex questions about your organizational structure and sometimes request personal information from your officers and directors. Fortunately the Streamlined Sales Tax Central Registration System offers an easy mechanism to register in any one (or more) of its 24 member states.
Assuming you can calculate tax correctly (meaning you know the applicable state, county, city, and district rates that apply at the delivery address and you know any special tax rules that apply to the product and service you are selling) timely and accurate filing and remittance becomes your next challenge. Compliance here is tricky, as sales tax forms can be complex, and in some states, if you are just a minute late, a penalty notice is sure to be issued.
Be on the lookout for any applicable simplifications to which you may be entitled. While by no means universal, a handful of states such as Alabama, Louisiana, and Texas allow remote sellers to avoid much of the complexity associated with local-level compliance.
Sellers also must account for their own success. Although your company may not cross an economic nexus threshold today, you may cross it tomorrow, next month or next year. Once you do, the rules (of course) vary on a state-by-state basis on how soon you need to start collecting.
Simplifying the Complexity of Economic Nexus
Between evolving rules and the shifting tax compliance landscape, managing your own compliance can be a complicated and overwhelming challenge, not only for small sellers, but for remote sellers of any size. Some companies choose to leverage third-party software providers that allow ecommerce retailers to stay ahead of new economic state standards and ensure consistent compliance. Additionally, these solutions can scale as a business expands and readily integrate enterprise resource planning tools and shopping cart vendors.
If planned and executed well, the effective use of tax automation can facilitate tax compliance and meaningfully ease the struggle ecommerce associated with tax compliance today.
There is no denying that economic nexus requirements are here to stay and that rules will develop and evolve over time. Given this dynamic environment, ecommerce companies must stay alert to critical changes impacting their organizations and should consider investing in solutions that allow them to pivot as necessary to maintain compliance amid this shifting landscape.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Charles Maniace is vice president of regulatory analysis and design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15-year career in tax and regulatory automation, Charles has provided analysis to WSJ, NBC and more.