Nexus challenges have intensified in the U.S. since Wayfair’s establishment of economic nexus in 2018. So much so that, today, the federal government is taking a closer look at post-Wayfair sales tax rules and nexus criteria affecting online sellers and marketplace facilitators.
The ongoing growth of e-commerce also will contribute to more scrutiny from state auditors in 2023. It is crucial for tax professionals to understand how each state measures economic nexus -- via annual online sales thresholds and/or via thresholds based on the number of online transactions a company conducts with consumers in a state each year. Understanding the various provisions in calculating economic nexus is where the Sales Tax Institute’s Economic Nexus State Guide is helpful. It also remains important to understand physical nexus rules as well as interpretations of “substantial physical presence.” These interpretations may extend to inventory locations, trade show attendance and remote employees (a major issue following the pandemic-driven move to remote and hybrid working models).
Interpretations and enforcement of physical and economic nexus continue to change, often in response to litigation and court rulings. Recent court cases in several states could have had significant repercussions, including the following two states:
- Pennsylvania: The Pennsylvania Department of Revenue (DOR) elected not to appeal a ruling that the DOR did not have sufficient evidence to prove that an out-of-state businesses selling merchandise through the Fulfillment by Amazon (FBA) program had enough contacts with the state to warrant those businesses to collect and remit sales tax based on physical presence of the inventory in a Pennsylvania-based Amazon warehouse. A number of states – including Arizona, Arkansas, Illinois, Iowa, Kansas, Oklahoma and Texas – have taken similar stances regarding insufficient nexus related to third party fulfillment and warehousing. Most of these states adopted this position recently in response to the enactment of Marketplace Facilitation legislation as well as economic nexus. Due to the litigation in Pennsylvania, this would apply retroactively. However, in most of the other states, the change is prospective from the administrative policy position. Pennsylvania had been aggressively going after sellers, so this is a big win for taxpayers.
- Louisiana: Louisiana faces complaints from an Arizona-based jewelry wholesaler, Halstead Bead, that claims the state’s sales tax system is unconstitutional due to its compliance burdens on out-of-state sellers. Most recently, Halstead Bead filed an opening brief to the U.S. Court of Appeals for the Fifth Circuit, urging it to reopen its case against the state of Louisiana, after it had been dismissed by a federal judge. Louisiana is a home rule state and has 64 parishes, and each of those local tax jurisdictions administers different sales tax requirements. Louisiana was also active on the legislative front last year. This is largely good news for taxpayers given that the three acts Louisiana’s governor signed into law are designed to create greater uniformity among those 64 parishes’ auditing programs and the way collectors’ report sales taxes.
The federal government also expressed growing interest in post-Wayfair sales tax rules and compliance challenges last year. In June, the U.S. Senate Finance committee hosted a full committee hearing to examine the impact of the South Dakota v. Wayfair decision on small business and remote sellers.
As one of the expert witnesses at that hearing, I testified that the economic nexus rules enacted as a result of the Wayfair decision have made things harder for some businesses, particularly those with limited physical presence in multiple states and even more so on those businesses located in one of the four states without a general state or local sales tax (Delaware, Montana, New Hampshire, and Oregon). States have the right to impose sales tax collection responsibility on out-of-state sellers; however, the U.S. Supreme Court said the states can’t impose too great of a burden on those out-of-state sellers. If the states don’t want the federal government intervening, they should take steps to simplify the burdens, starting with clarity regarding when a business is required to collect tax as well as raising the thresholds for what activities or economic levels that create a registration and collection responsibility.
For more information on nexus and U.S. sales tax trends in 2023, click HERE
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