Economic Nexus: Enforcement is Coming

Charles Maniace
December 4, 2019

We are now more than 16 months removed from the groundbreaking Supreme Court decision of South Dakota v. Wayfair. This decision unlocked the ability for U.S. states to impose a sales tax collection and remittance responsibility on remote sellers based solely on their economic connection to that state. Within that time, virtually every state imposing a sales tax (except Missouri and Florida) have enacted remote collection requirements. In most of those states (except Louisiana) those requirements are legally in effect, meaning the requirements are fully enforceable against remote sellers. In fact, in a number of places, remote collection rules have been on the books for more than a year. 

To date, many states have been focused on creating the necessary framework to facilitate compliance. For example, the state of Colorado has spent considerable energy explaining its rules to any taxpayer willing to listen. Likewise, Texas, whose requirements came into effect last October, has crafted simplified requirements for remote sellers. States have yet to wrap their brains around the idea that standard audit practices cannot be effective in a world where they must enforce rules against hundreds of thousands of additional taxpayers, but it’s only a matter of time before we see a concerted attempt at enforcement.

California’s approach to enforcing sales tax nexus

Over the last few weeks, it’s been widely reported that the state of California has sent some eye-popping assessments to taxpayers. Back in the old days, sales tax nexus was based on physical presence, loosely translated as having people or property in a jurisdiction. Even under the old rules, businesses that utilized third-party facilitator services that stored the seller’s inventory in fulfillment centers throughout the country, had a tax collection responsibility in whatever states those fulfillment centers were located. Since the seller held title to their own inventory sitting in the facilitator’s warehouse, they held property in the jurisdiction. While it may have taken California some time, it appears the state is now aggressively enforcing tax collection requirements under those historical rules, and since states can go back as far as their statute of limitations may allow, the audit risk for non-compliant taxpayers is substantial.

In Wayfair, the Supreme Court held the physical presence requirement was “unsound and incorrect” from the day it was announced, but they also signaled that states would be unwise to attempt a retroactive enforcement of economic nexus. At the time, the only state seriously contemplating retroactive enforcement, Hawaii, quickly changed its mind and informed taxpayers that remote sellers falling within their threshold would be required to collect from July 1, 2018 onward.

What remote sellers can expect from increased enforcement

The recent experience of California taxpayers is informative to understand what might be next for pure remote sellers that have yet to adopt solutions to manage their vastly expanded collection and remittance requirements. 

  • If you continue to take a “wait and see” approach…
  • If you have been sitting on the sidelines hoping the U.S. Congress will step in and put a halt to remote collection…
  • If you have been thinking that states won’t adopt processes that will enable enforcement against far flung taxpayers…

…the time may be right to reconsider your strategy.

While most states will likely respect the Court’s admonition against retroactive enforcement, there is nothing retroactive about enforcing a rule back to its effective date. Meaning if a state enacted an economic nexus requirement concurrent or subsequent to the Wayfair decision in June 2018, those rules are ripe for enforcement and companies can be assessed back to the date those rules became effective. The clock is ticking, and the longer you wait to become compliant, the bigger the backlog of untaxed transactions becomes, increasing your audit exposure along the way. Non-compliance is a risky business and getting riskier by the day.

Take Action

 See the S.D v. Wayfair Economic Nexus Table for details on each state’s effective and pending remote sales tax collection legislation.  

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15 year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC and more.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

Tax Compliance Tax Information Reporting United States
September 22, 2020
2020 GCS Speaker Spotlight Series | KPMG & Zions Bancorporation

Sovos’ Global Compliance Summit – Intelligent Reporting “Speaker Spotlight” Series kicks off with the introduction to two brilliant women in the world of tax, Kelli Wooten of KPMG LLP and Susie Jensen of Zions Bancorporation, who will be attending & presenting at our upcoming conference in early October. These two professionals are particularly well-versed in […]

EMEA IPT
September 22, 2020
The Benefits of Insurtech to Captive Insurers

Tax filing, wherever you are in the world, is becoming increasingly complex, with regular rate updates and governments eager to close tax gaps via new mandates that demand real-time reporting. Despite this, many captive insurers still rely on resource-heavy, manual procedures to capture, validate and process large volumes of data. As well as taking significant […]

ShipCompliant
September 18, 2020
The Data: Wine DtC Shipments and Off-Premise Retail (August 2020 Special Report)

The wine market is in greater flux than ever as producers, retailers and consumers navigate the impacts of a global pandemic. Keeping a pulse on marketplace data has never been so important given these shifting dynamics. Nielsen is collaborating with Wines Vines Analytics and Sovos ShipCompliant to provide a much more comprehensive view of the […]

Tax Compliance Tax Information Reporting
September 18, 2020
Updated Publication 1220 Pushes States Towards Direct State Reporting for Form 1099-NEC

The IRS has released the 2020 version of Publication 1220. One of the most notable changes is that Form 1099-NEC (Nonemployee Compensation)—which was previously reported on Form 1099-MISC utilizing Box 7—will not be a Combined Federal/State Filing (CFS) form. This means that Form 1099-NEC cannot be filed with the states through the CFS Program. The […]

EMEA IPT
September 16, 2020
Navigating Insurance’s Digital Highway

From underwriting to reporting, the insurance industry is having to adjust and by choice or imposed, is embracing the digital evolution of its practices. On the reporting front, more tax authorities are forcing insurance companies to tailor their internal processes by jurisdiction, directly impacting the collection of information at the underwriting stage. Digitized services continue […]