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Monday, September 2, 2019

Two States Using Wayfair Economic Nexus Standard More Broadly


As we know, the June 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., et al, allows for an economic nexus threshold for all types of taxes. Many states already had an economic nexus threshold for income taxes. Many states have adopted the South Dakota threshold for nexus. This standard generally starts use tax obligations when a vendor has over $100,000 of sales in the prior calendar year or the current year to date or 200 or more transactions.

Now, one state - Hawaii, has adopted that same threshold for its state income tax effective for tax years beginning after 12/31/19.  [SB 495 (Act 221, 7/2/19)] Hawaii's sales tax nexus threshold based on the South Dakota law upheld by the Court started 7/1/18.

Also, the Texas Comptroller has proposed the same via a proposed regulatory change for its franchise tax. The Texas sales tax Wayfair threshold though is over $500,000 of sales and it doesn't matter how many transactions there are (there is only a dollar sales threshold).

Remember that a state cannot override P.L. 86-272 which still applies to limit nexus if a taxpayer has no physical presence other than sales personnel who solicit orders that are approved and shipped from out-of-state. This is relevant for Hawaii's state income tax, but doesn't apply to the Texas franchise tax because it is not a net income tax.

Making the thresholds the same should be a lot simpler for small businesses. I don't agree with the South Dakota threshold's 200 or more transactions because for many small businesses though because that can be a small dollar amount, such as if selling items that cost less than $10 each. I think that is not sufficient nexus for commerce clause purposes.  I think states should do like California and Texas did and drop the transaction threshold and only use a dollar of sales gross receipts that is at least $100,000 and perhaps higher in large states (after all, buyers not charged sales tax still have to pay use tax on their own, and the higher threshold keeps the burden on the state tax agency more manageable and more likely that most remote vendors will be found and have to collect.

Not all states define sales the same for these purposes so there is still complexity for multistate sellers. But for a remote seller to know that once they have use tax collection obligations in a state they also have income tax obligations (assuming they are not protected by PL 86-272), should provide greater certainty to businesses and state tax agencies and simplify recordkeeping.

What do you think?

3 comments:

Unknown said...

Excellent article.

There is more to this case than meets the eye. One basic premise of the case, that it expanded nexus is pretty much cost free, is patently false. Wayfair -- a retirement present to a judge who never prepared tax returns -- is a costly nightmare for a large number of non-large businesses. Such firms actually exist, and actually employ significant numbers of people. These are lean firms, firms without HR Departments, CFOs, large software budgets, and accounting staff with nothing to do. Dealing with another 50 tax returns a year, along with audits, lien letters, and the other baggage that accompanies expanded legal nexus, is expensive. Changing software packages is not a low cost option. There will be hell to pay; one could view Wayfair as yet another means by which big business uses regulation to unfairly compete.

Although the only issue in the case was forcing out-of-state retailers to collect and remit use tax -- because it is too much of a burden on states to actually collect such taxes directly from their residents -- many view the case as setting the standard for all state and local taxes. If this is true, the good news is that the quite real burden on smaller business may finally prod Congress into dealing with nexus again, which it has ignored for nearly 70 years. Just as happened when the U. S. Supreme Court similarly wore their statist blinders when deciding Northwestern States Portland Cement, and Congress passed P.L. 86-272.

The other good news is that, having, as expected, adopted an extreme version of Wayfair, California is being hoisted on its own petard: nexus limits throwback of sales, and thus is reducing "California source" income by in-state sellers on their interstate sales to states where the sellers lack people or property.

Yes, this will be fun.

John Karayan said...

I posted this, and did not mean to do so anonymously. John Karayan jekarayan@gmail.com

21st century taxation (Annette Nellen) said...

John, thank you for making all of these excellent points. Small and medium size vendors without a tax staff or tax department also face the challenge of keeping track of state thresholds and knowing when they cross one and have to get ready without any lead time to collect on that next sale into that state. There are software providers and companies that will help with the compliance, often charging very low fees, but I don't think all sellers know how or have sufficient time to explore all of their options.

PL 86-272 was enacted in 1959 within 7 months of a U.S. Supreme Court decision that concerned Congress that states might get too aggressive in imposing income tax obligations (Northwestern Cement v. Minn., 358 US 450 (1959). We're beyond 7 months of the Wayfair decision, but seems to be too many other topics on the congressional agenda.