Sales Tax Economic Nexus Law Update – Where Are We Now?
It has been nearly three years since the landmark decision of South Dakota v. Wayfair, Inc. (“Wayfair”), which upheld states’ adoption of sales tax economic nexus laws. Notably, the Court partially hinged its ruling on South Dakota’s small seller safe harbor thresholds, which limited the state’s ability to assert sales tax nexus for remote sellers that had more than $100,000 in South Dakota-sourced receipts or 200 or more transactions with South Dakota-based customers.
Since the Wayfair decision, 45 states have adopted sales tax economic nexus rules in some form, all with varying effective dates. Accordingly, all states that impose a sales tax have now adopted, or will soon adopt, an economic nexus law. It is important to note, particularly when evaluating historical sales tax filing requirements, that several states have adjusted their small seller safe harbor thresholds after initially enacting their economic nexus laws. For example, Georgia’s economic nexus law was effective January 1, 2019 with a small seller safe harbor threshold of $250,000 in retail sales of tangible personal property and less than 200 transactions. However, Georgia lowered the retail sales threshold to $100,000, effective January 1, 2020.
In any case, while states have broadly adopted economic sales tax nexus laws, the results are varying year-to-year and require a more nuanced assessment to properly identify when a taxpayer has effectively triggered a filing requirement.
WAYFAIR APPLIES TO ALL BUSINESSES
As a reminder, state’s economic nexus laws generally do not differentiate between business types or revenue models. Rather, all businesses that meet a state’s definition of a remote or out-of-state seller are subject to that state’s economic nexus laws.
For example, Georgia law defines a remote seller as “any person who makes a sale of tangible personal property from outside of Georgia that is to be delivered electronically or physically to a location within Georgia.” As such, while the initial misconception was that the Wayfair decision would only impact e-commerce companies, Georgia’s economic nexus law, like most others, impose sales tax compliance requirements for many industries.
Amid their adoption of economic nexus laws, one area of uncertainty has arisen for e-commerce businesses that sell third-party goods and services on their platform.
Generally, sales taxes are required to be collected by the retailer (in this case, the third-party sellers) from their customers. However, several states opted to find the more convenient solution by enacting legislation requiring marketplace facilitators to collect and remit sales taxes on behalf of third-party sellers using their online marketplace or forum. As a result, states can now collect the tax from one taxpayer rather than from dozens to hundreds of smaller taxpayers.
It is worth noting that states’ small seller safe harbor rules for economic nexus generally apply to the marketplace facilitator laws.
KEY LEGISLATIVE UPDATES
- Florida: Florida is the latest state to join in adopting sales tax economic nexus rules. Effective July 1, 2021, remote sellers and marketplace providers are required to collect and remit sales and use taxes when their total sales to Florida buyers exceeds $100,000 during the previous calendar year. Notably, this $100,000 threshold is calculated solely on retail sales of tangible personal property.
- Additionally, Florida has enacted a safe harbor for remote sellers and marketplace providers with a physical presence in the state. Remote sellers are relieved of liability for tax, penalty and interest due on remote sales that occurred before July 1, 2021, provided that the person registers with the Department of Revenue before October 1, 2021. However, marketplace providers with a physical presence in the state are provided relief only for sales facilitated by the marketplace provider on behalf of a marketplace seller.
- Kansas: As of October 1, 2019, remote sellers that had any contact with Kansas were required to collect and remit sales tax to the state. That meant remote sellers with any sale, even as little as a $1 transaction, into Kansas had economic nexus in the state. The Kansas Legislature attempted to create a small business remote seller safe harbor through S.B. 50 to address this issue; however, the governor of Kansas vetoed their efforts, twice. On May 3, 2021, the Kansas Legislature overrode the governor’s veto of S.B. 50. Now, effective July 1, 2021, retailers are required to collect and remit sales tax when their cumulative gross receipts to customers in the state exceeds $100,000. Notably, retailers that meet the $100,000 threshold for the first time in the current calendar year, will only be required to collect and remit sales tax on sales in excess of the $100,000 threshold.
- Missouri: On May 14, 2021, S.B. 153 was passed in the Missouri Legislature. Under the bill, vendors and marketplace facilitators will be required to collect and remit sales tax beginning on January 1, 2023, when their cumulative gross receipts from the sale of tangible personal property into the state is at least $100,000 in the previous or current calendar year. It is expected that the governor of Missouri will sign this bill in to law, which will make Missouri the 46th state to have sales tax economic nexus rules.
- Chicago, Illinois: As a home rule jurisdiction in Illinois, Chicago requires remote sellers to collect and remit the Personal Property Lease Transaction Tax. Effective July 1, 2021, out-of-state businesses with no physical presence in the City of Chicago and less than $100,000 of sales will not be required to collect the City’s Personal Property Lease Transaction Tax unless they have “other significant contacts” within the city. Additional localities, particularly those in Alaska and Colorado are beginning to adopt economic nexus laws amidst potential legal challenges.
As states have expanded their economic nexus provisions in response to Wayfair, we anticipate a similar expansion for states’ taxability classifications for various products and services particularly given states’ budgetary shortfalls amidst COVID-19. For example, Maryland began subjecting sales of digital products and software-as-a-service (“SaaS”) to sales tax effective March 14, 2021.
HOW BENNETT THRASHER CAN HELP
Bennett Thrasher’s state and local tax team is uniquely positioned to help your business:
- Determine when and where you are required to collect and remit sales taxes under the new economic nexus rules;
- Determine whether your products and/or services are subject to sales tax in those states; and
- Find a sales tax compliance solution (including management of exemption certificates) that fits your business’s needs.
Additionally, our State and Local Tax team can identify and resolve any prior period sales tax exposure issues, prepare your business for a future sale and assist with many other state and local sales or income tax matters.