A topic of conversation on the recent Sovos and Deloitte Tax LLC webinar, “The Speed of Sales Tax – How to Stay Ahead of Changing Regulations in 2019,” was whether or not states will seek further economic nexus simplification.
State of sales tax economic nexus
Currently, there are 36 states enforcing sales tax economic nexus rules. While many of these states are streamlined sales tax (SST) states, a good number of them are not. Whether these non-SST states will be determined to create an undue burden still remains to be seen.
California began enforcement April 1, 2019, while Texas is holding out until October 2019. There are still eight states, including Arkansas [Update 4/12: Arkansas enacts economic nexus law], Arizona, Florida, Idaho, Kansas, Missouri, New Mexico and Virginia, without sales tax economic nexus rules. Those dominoes will fall eventually, whether this year or next, according to our webinar panel. For example, New Mexico House Bill 6 has been enacted and is scheduled to create economic nexus July 1, 2019. Virginia House Bill 1722, also scheduled to pass July 1, will create economic nexus there. Kanas, on the other hand, has a bill before the governor, but the panel is not confident it will have an economic nexus standard there in the immediate future, believing it will be vetoed.
In Missouri, a very complicated taxing jurisdiction, there are a number of bills currently being debated and the state may be working on something for this year, while Tennessee is still in litigation.
Remote seller nexus simplification on the horizon?
South Dakota created the standard of 200 transactions or $100,000 in gross sales as the barrier to trigger an economic nexus registration and collection requirement after the South Dakota v. Wayfair decision. Our panel reiterated that there’s no magic in those numbers, but when the first states started to enact an economic nexus standard, they used those same numbers, viewing them as a bit of a safe harbor even though they were never intended as one.
A few states that initially enacted a 200 transaction, $100,000 in gross sale threshold are in legislation this year looking to potentially change that threshold as they bolster their rules by statute. For example, California may be changing to a $500,000 threshold, while North Dakota and Washington are following a trend of eliminating the number of transactions threshold and going simply with a gross sale type standard.
When asked if the panel was seeing a trend of states eliminating the number of transactions when adopting Wayfair economic nexus rules, an example of where things become murky came readily to mind:
Not all states count the number of transactions and sales the same way. For most states, a gross sales number is used as a proxy for economic presence. Others will count only taxable sales, some just retail sales, which could create exclusions for a lot of companies. Kentucky counts sales of products and digital property but not necessarily services or anything else. Illinois counts product sales including exempt sales, but not exempt sales for resale.
Chuck Maniace, director of regulatory analysis, Sovos, sees this as a practical concern, meaning these states recognize that to register a taxpayer and to process their tax return every single month is not a completely substantial burden. They’re trying to exclude from this process those businesses that may technically have an obligation but may not be particularly fruitful in the amount of revenue they bring.
Washington state, where taxing is based on amounts of retail sales as part of legislation that eliminated the 200 transaction threshold, is going to be moving from gross receipts on retail sales to cumulative gross income on January 1, 2020.
For further details about remote seller nexus simplification, such as what Alabama, Colorado and Louisiana and doing, where there may be undue burden and places that are ripe for challenge, view the webinar recording and download the slides.