Economic Nexus: Enforcement is Coming

This blog was last updated on January 19, 2024

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.