Out-of-state sellers that do not have a physical presence in states where they sell goods or services are now much more likely to be required to collect sales and use tax in such states. But in which states and at what rates?
This summer’s U.S. Supreme Court decision to uphold South Dakota’s economic nexus law in South Dakota v. Wayfair makes all remote sellers potentially subject to collecting sales tax. Sales tax collections are ramping up in Minnesota with new collection rules on in-state sales starting October 1.
A new threshold for requiring an out-of-state seller to collect and remit sales and use tax is “substantial nexus” within the state. With no universal, clear and complete definition of substantial nexus, remote sellers have work to do to see if they need to collect sales tax now.
What the ruling says
In June, the U.S. Supreme Court upheld South Dakota’s economic nexus law in South Dakota v. Wayfair, which requires out-of-state sellers with more than 200 transactions or $100,000 in sales into the state to collect and remit sales and use tax.
This ruling strikes down the 1992 the Supreme Court provided in Quill v. North Dakota that found a state could not require an out-of-state seller to collect sales and use tax unless the seller had a physical presence within the state.
However, this summer?s decision falls short in defining a clear definition of just what substantial nexus is. The ruling says:
- Substantial nexus does not require physical presence; and,
- South Dakota’s economic nexus law qualifies as substantial nexus.
States will likely pass laws similar to South Dakota’s and more aggressively enforce nexus that generates revenue. Several states have already enacted economic nexus laws, including Alabama, Rhode Island, Washington, Georgia, Hawaii, Illinois, Kentucky, Arizona, Wyoming, Indiana, Vermont, Maine, Massachusetts, Tennessee, Mississippi, and Louisiana.
With physical presence sidelined, remote sellers will need to look at each state’s nexus rule and ask whether activities directed at the state are substantial. While the parameters of substantial in South Dakota’s case are set annually at 200 transactions or $100,000 in sales, other states and local jurisdictions may apply different rules.
Other states are announcing new rules for marketplace providers and sellers with varying effective dates and small business exceptions. In Minnesota, for example, the small business exception?set to take effect no later than October 1, 2018– is set at a lower threshold, 100 transactions or 10 sales totaling more than $100,000 (see Minnesota requires certain sellers to collect tax on in-state sales starting October 1.
These changes may require sellers to monitor compliance requirements state-by-state and seek new or expanded software solutions to simplify sales tax compliance and minimize the impact to business. An analysis of whether sales activities have or could create nexus and a review of taxability and exemption certificates can give businesses a baseline for sales tax compliance and ease the way to change as each new rule comes down the pike. If you meet in-state economic nexus thresholds, give us a call to determine your best course of action.
If you meet in-state economic nexus thresholds, give us a call to determine your best course of action.
Let’s talk tax
Judy Vorndran can be reached at firstname.lastname@example.org or 720.227.0093. Follow Judy on LinkedIn.