States Rush to Pass Economic Nexus Legislation
Following the Supreme Court’s June 2018 decision in South Dakota v. Wayfair, states have acted quickly to enact economic nexus laws to require remote sellers to pay sales tax. “Economic nexus” is the power of a state to compel remote sellers to pay sales tax on their transactions with purchasers in the state. As of October 1, 2019, economic nexus laws have gone into effect in all states with a statewide sales tax, except Missouri and Florida. States are using economic nexus laws to compel remote sellers, or sellers with no physical presence in the state, to collect sales tax if the seller’s economic activity in the state reaches a pre-determined threshold. Previous laws required the seller to have a physical presence within the state, such as a brick-and-mortar store, office, or warehouse.
Most states have adopted the economic nexus standards endorsed by the Supreme Court in the Wayfair case. Under these standards, a remote seller can be required to collect sales tax if the seller enters 200 transactions with purchasers in the state or generates $100,000 of annual gross revenue from the state. Larger states, like California, Texas, and New York, adopted higher thresholds of $500,000 of annual gross revenue. A few states, such as Arizona, Iowa, and Tennessee use only gross revenue to determine nexus. Using gross revenue to determine economic nexus seems like the best way to capture sellers with significant economic activity in the state. For some sellers, 200 transactions is not a high bar and may not represent much in profits. For instance, a seller making 200 transactions of a $5 item realizes a gross revenue of $1,000. Perhaps future legislation will help minimize the burden on the sellers who are truly small. Kansas’ economic nexus standards are the most strict, as Kansas requires all remote sellers to collect Kansas sales tax. However, this law may not withstand constitutional scrutiny if it is eventually challenged.
In addition to paying statewide sales tax, remote sellers may also have to contend with requirements to pay local sales tax in the states where they register. States vary in how they approach local sales tax, but many states require the seller to collect all taxes applicable in the location where the product is delivered. Some states allow remote sellers with no physical presence to pay one, flat local rate on all sales to the state. Alabama and Texas allow remote sellers to pay a flat, local rate. Collecting local sales tax is not as daunting as it may initially seem. Many states collect local sales tax on behalf of all local units of government, meaning the seller files one return with the state revenue department reporting all statewide and local taxes. However, this becomes much more complicated in states that allow home-rule jurisdictions to administer their own taxes. States that are notorious for these taxes are Alabama, Colorado, and Louisiana. Those states require the seller to register and file separate returns with non-state administered jurisdictions. In the case of Alabama and Louisiana, sellers need only register in jurisdictions where they have a physical presence. Colorado, on the other hand, recently passed a law that requires all sellers to register in each jurisdiction where a product is delivered. This means that in order to sell products throughout the state of Colorado, a seller would need to register separately in up to 74 jurisdictions! This law has been heavily criticized and may be mollified in the future with a central registration system.
Much has changed over the last year in state and local sales tax. We expect more changes to take place as states fine-tune their laws to account for the challenges faced by remote sellers. We plan to monitor developments in the area of sales tax and write updates about any significant changes here.
This article is provided for general information and should not be relied upon as legal advice for a specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.
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