Nexus and the sales tax snowball-into-avalanche

Envision a snowball rolling downhill becoming an avalanche, and headed straight for you. That’s just about your position if you have exposure through sales business activity in multiple states, as revenue departments ramp up their sales tax nexus standards in the rather large wake of a 2018 U.S. Supreme Court ruling.

For years the standard for sales tax collections in a state rested on a business having a physical presence in the state. Then came the rise of Amazon and other online sellers, and states felt left out. They didn’t like that. South Dakota filed a lawsuit that went to the Supreme Court and resulted in South Dakota v. Wayfair, which overturned Quill Corp. vs. North Dakota, an earlier Supreme Court decision that established the physical presence standard.

The Wayfair decision meant that businesses that don’t have a physical presence in a state, but that nevertheless have more than $100,000 in sales or at least 200 sales transactions in a year, would have to collect the applicable sales taxes and pay up.

The American Institute of Certified Public Accountants (AICPA) listed three elements of the ruling.

• “It is not retroactive, meaning South Dakota can’t look back and require collection and remittance of sales and use tax on previously purchased items.
• “Only merchants who have considerable amount of business are required to collect (according to the South Dakota law in question that means $100,000 in in-state sales or over 200 orders in the state).
• “South Dakota is one of 20 states that have adopted the Streamlined Sales and Use Tax Agreement, which provides certain standardization within the sales and use tax statutes “to reduce administrative and compliance costs” for remote sellers.”

Though the AICPA notes that only entities with “considerable” business in a state will be affected, Wayfair’s threshold is, practically speaking, low. Many companies will likely be caught in its net. When governments have legal doors opened that give them an opportunity to collect more money, it’s like ringing the dinner bell on Thanksgiving.

On May 14, 2019, Accounting Today noted that states were moving swiftly to capitalize. The headline: “States moving fast on economic nexus standards”:

“The 19th annual Bloomberg Tax Survey of State Tax Departments found that states with an economic nexus standard for sales tax more than doubled over the last year in the wake of the Supreme Court’s Wayfair ruling. Thirty-three states responded that they now have an economic standard in place for sales tax nexus. Six states said they have an economic nexus standard that is not currently being enforced due to the legislation’s effective date or pending litigation.”

A challenge to retailers engaged in multi-state business is that there is no single set of definitions, as state requirements vary. The website Avalara has a good state-by-state guide. (as of Dec. 16, 2019)

With their new authority, states are expanding the conditions under which tax might be assessed. Employees within the state, ties or financial relationships with in-state businesses, or even the manner in which a company sends an employee, even temporarily, into the state, could be the tripwire that results in taxes being owed.

Businesses conducting multi-state sales efforts are well-advised to keep abreast of what’s happening at the state level, even if there doesn’t seem to be a possibility that sales tax might apply. In addition, some states are already starting to employ these new economic nexus standards to income tax (more about that in the next blog installment).

The snowball is rolling, and you don’t want to be buried in the resulting avalanche.