Economic nexus laws enacted post-Wayfair targeting remote sellers and marketplace facilitators vary from the laws in the Wayfair case. Some states have followed the standards in Wayfair while others have not. Let’s take a quick look at these new laws.
First, we’ll go over the standards the Supreme Court looked at in Wayfair.
South Dakota Standards Under Wayfair
The U.S. Supreme Court ruled in Wayfair that physical presence isn’t needed for sales and use tax nexus. This cleared the way for South Dakota to enforce a law requiring a remote seller lacking in-state physical presence to collect and remit the state’s sales tax if, it had:
- over $100,000 in South Dakota sales of personal property, products transferred electronically, or services; or
- at least 200 of such sales transactions.
These thresholds applied based on sales made in the previous or current calendar year.
State Standards After Wayfair
The upholding of South Dakota’s sales tax economic nexus standards has led to many states adopting similar standards for:
- remote sellers; and/or
- marketplace facilitators.
Also, like in Wayfair, many states include electronic products in calculating thresholds, such as:
- digital products and electronically downloaded products, like Georgia, Maine and South Dakota;
- intangible property, like Hawaii; or
- digital code, like Arkansas.
States have also adopted similar time periods for counting sales included in their thresholds like counting sales made in:
- the previous or current calendar year—which is the overall trend;
- the previous 12 months, like Pennsylvania and Texas; or
- 12 consecutive months, like Minnesota.
However, some states have adopted laws and policies that vary farther from the South Dakota standards. Let’s look at some of the different rules enacted by the states.
Economic Nexus Thresholds, and the Tweaking Thereof
Some states changed economic nexus standards they had in place before Wayfair. Some changes are designed to bring in additional sales tax revenue, while others lean more towards the business friendly end of things. For example:
- California increased its sales threshold for remote sellers from over $100,000 to over $500,000 and will apply the over-$500,000 threshold to marketplace facilitators
- Connecticut increased its transaction threshold from at least 100 to at least 200
- Washington removed its 200-transaction threshold
Standout Thresholds: States Requiring a Greater or Lesser Economic Presence
While the Wayfair over-$100,000 sales threshold is generally the norm among states, some notable standouts, in addition to California noted above, include:
- Alabama: over $250,000 for remote sellers and marketplace facilitators in the previous calendar year.
- Massachusetts: over $500,000 for out-of-state Internet vendors in the preceding calendar year.
- Mississippi: over $250,000 in the previous 12 months.
On the transaction side of the thresholds, some states have strayed from the 200-transaction Wayfair norm.
Lower Transaction Threshold
A few states have transaction thresholds that are lower than 200 transactions.
For example, Massachusetts and Minnesota have thresholds of at least 100 transactions.
New York’s threshold is over 100 transactions.
To add to the complexity, the time periods for counting transactions also are different for each of these states. Taxpayers will have to look at:
- the preceding calendar year in Massachusetts;
- 12 consecutive months in Minnesota; and
- the preceding four sales tax quarter in New York.
More than a handful of states have no threshold for transactions. In that case, remote sellers and marketplace facilitators need to look only to the sales threshold.
Everybody Fan Out: Accounting for Related Entities
Not so fast… some states don’t allow taxpayers to calculate the thresholds of individual businesses that are related separately.
States also don’t allow relying on a hold harmless provision when a related entity provides incorrect information.
In fact, some states have taken a proactive stance against these practices.
Conduct to Defeat a Threshold
In Texas, the Comptroller can consolidate the total Texas revenue of sellers engaged in conduct that defeats the over-$500,000 threshold.
Limitation on Liability Limitation
Some states hold marketplace facilitators harmless for collecting an incorrect amount of tax when they receive incorrect information from a marketplace seller. However, the hold harmless rule applies only if that seller is unrelated to them or not them.
With respect to evasion, South Dakota’s DOR not only takes a proactive stance to identify remote sellers who meet either of the state’s thresholds, but it relies in part on citizen notifications.
Does This Count? What Sales are Included in the Thresholds
States often apply economic nexus thresholds to taxable retail sales of various items and services. However, there are some notable variations:
- Illinois advises that exempt sales count toward the state’s thresholds.
- Michigan includes taxable and nontaxable sales in calculating its thresholds.
- New York includes in its thresholds taxable and exempt sales of personal property, without deduction for expenses.
And with respect to marketplace facilitators, multiple states include sales made on the facilitator’s own behalf and sales made on behalf of a marketplace seller.
Looking Ahead: Simplification and the Repeal of Use Notice Rules
States will continue to enact economic nexus laws and streamline them. States with such laws before Wayfair or that rushed to enact laws after Wayfair already are updating their nexus laws. Some areas to watch moving forward include simplification and repeal of use tax notice and reporting requirements.
Simplification of Economic Presence for Nexus
Practitioners should be on the lookout for states moving toward sales tax collection simplification.
For example, Alabama provides for remote sellers and marketplace facilitators meeting the sales threshold to collect and remit the state’s flat 8% Simplified Sellers Use Tax (SSUT).
Repeal of Notice & Reporting Requirements
Also, states may follow the trend of repealing remote seller use tax notice requirements. For example, Kentucky repeals these requirements as of July 1, 2019.
Also looking forward, it should be interesting to see if more states make adjustments to their thresholds, in what direction these adjustments trend, and whether more states take defensive measures against fraud.