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New Economic Nexus Laws for Sales Tax

When you have sufficient activity in a state that requires a business to register and file business taxes or to collect sales tax, you are said to have nexus in that state.

There was a time not long ago that, if a business was only located in New York State, we did not pay much attention to nexus issues in other states. Physical presence of property or personnel was required to create nexus. In the past few years however, we’ve been introduced to economic nexus for Corporation and Income Tax. That is, nexus based on economic activity – not physical activity. Now, we must pay attention even if your only contact with states is having sales to customers in those states.

Economic nexus is now also being applied to Sales Tax collection responsibilities. If you believe that sales shipped out of state are not subject to sales tax, you may be wrong, depending on the state you’re shipping to. Wyoming just became the newest state to pass legislation to require remote sellers with no physical presence there to collect Wyoming sales tax. The law signed on March 1 becomes effective July 1, 2017.

A business with no physical presence will be required to collect Wyoming sales tax if in the current or preceding year:

  • You have more than $100,000 in sales into Wyoming or
  • You have 200 or more separate sales transactions into Wyoming.

Why are the states doing this?

Online shopping is increasing and local store shopping is decreasing. When people shop online, often the vendor is not located in their state; therefore sales tax is not charged. As tax professionals know, even though sales tax is not charged by the out of state vendor, the purchaser owes use tax to their home state. We also know that very little of this use tax is actually paid, and it is almost impossible to monitor this and enforce collection. States now feel that they must pass these new laws to regain their lost revenue.

You might ask…Isn’t there a Supreme Court decision, Matter of Quill, that established that physical presence is required before a state can claim that you have nexus for sales tax collection?

The answer is yes. However, states like Wyoming are challenging Quill by passing new laws and forcing companies to collect their state sales tax. We can challenge these laws in court, but state courts are not likely to overturn them and the U.S. Supreme Court has not been accepting any nexus cases. In fact, in a related matter, a Supreme Court Justice expressed sympathy to the states that are losing sales tax revenue as a result of internet sales and suggested that the decision in Quill should be revisited.

South Dakota and Alabama have already passed similar laws, and several other states have proposed them. Colorado took a different approach, instead requiring vendors with sales of over $100,000 into Colorado to notify customers of their use tax responsibility. The vendors must also send information on customer purchases to the state of Colorado. This practice is similar to a federal Form 1099 for income reporting.

If you have any questions about nexus, please call 516-938-5219

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