The most commonly used threshold for states is that if a business makes more than 200 transactions or $100,000 in another state, the business has a connection (i.e. presence) in that particular state and must pay sales tax. Many States address this issue in the provisions on the market tax (and not in the provisions on distance sellers) that may have been adopted after the adoption of the provision on the economic link of the distance seller. The U.S. Supreme Court`s Wayfair case overturned Quill`s decision. While the judgment does not have the power to determine which actions create a bond, it said no physical presence is required. This meant that states could impose sales tax collection on merchants outside the state, even if those merchants had no physical connection to the state. Each state has different standards. However, don`t be lulled by a false sense of security when looking at the rules. The definition of what constitutes a link is very fluid. Two examples are Ohio and Oklahoma, which changed their ties in one year.
In most states that have both a turnover and transaction threshold, this is a “OR” situation, meaning that only one of the thresholds is sufficient to prove an economic link. In some countries, turnover and transaction thresholds must be met to establish the existence of an economic link. In 1959, Congress passed the Interstate Income Act, commonly known as Public Law (P.L.) 86-272. In order to promote inter-State trade, P. L. 86-272 that the mere request of a distance undertaking does not create a link with that State. There is no specific common definition of the relationship between the 50 States. In addition, definitions and rules for determining the link are constantly changing, and most States are careful to give themselves flexibility in their definitions. This means that when determining the link with VAT, a company must look at each state individually and remain constantly up to date with a number of changing regulations and interpretations. The economic context was a central issue in South Dakota v. Wayfair before the U.S. Supreme Court.
21. In June 2018, the United States Supreme Court ruled in favour of South Dakota, striking down the traditional physical presence rule as a necessary condition for imposing VAT and collection requirements on a remote retailer. This was the first Supreme Court decision on the link since 1992. States now have the right to require the collection of taxes from online merchants and other long-distance merchants without a physical presence in their state if they meet certain economic thresholds. The affiliation relationship is when an out-of-state enterprise has a “subsidiary” in the state. Thus, the non-State enterprise would have a sufficient presence in the national enterprise for the State enterprise to be obliged to collect and pay VAT on extra-State activities. Desperate to compensate for their losses, states began to attack the “physical presence” rule. They did this in different ways, but the most popular method was to create a new definition of the bond that did not require physical presence.
While there are other link standards, the most relevant and popular has been the “economic link.” What is the definition of this new economic link? The economic link is a sales threshold which, once reached, automatically links the link to a state, regardless of physical presence. Since June 2018, many customers have expressed concern about the impact of this new definition of Nexus on their business. If you`re making sales in multiple states or more, I usually recommend a link study. What is a nexus study? A link study is an assessment of your business to determine which states you have a connection with and what your potential tax risk is if you have not registered by the effective date of your economic link threshold. In short, we assess your company`s finances in the context of the latest laws and regulations and identify the states in which you need to collect and remit taxes. Given that each state has a different threshold, a different effective date, different registration procedures, and associated nexus rules, all of which change after the June 2018 case, it is important that a nexus study is conducted with great care and expertise. Once these states are identified, a nexus study can assess the level of your tax risks and the best way to limit potential liabilities in the past. With 20 states reimbursing taxes paid upon registration, failure to properly execute a registration plan can have potentially devastating consequences. Even if you are dealing with only one state, some states take aggressive positions at the time their economic link thresholds come into effect, and there could be a serious responsibility to deal with when registering in that state. Once past liabilities are addressed, a linkage study can provide guidance on how and when changes should be implemented in the future. Some states, such as Florida, still do not have an economic connection threshold, while others, such as California, have thresholds that are not yet in effect. It is probably only a matter of time before all states introduce some kind of threshold.
Is your company ready for these expected changes? Once a threshold is announced, there is often only a short window of time for taxpayers to register and comply with the effective date. Many taxpayers simply do not have the systems in place to implement these changes effectively and may need guidance on how best to implement them. States across the country are rapidly adopting economic sales tax link thresholds. But the problems only start there. Many states have different thresholds that come into effect at different times. With this in mind, the most popular economic link threshold is $100,000 in sales made in a state in a year, or 200 separate transactions made in a state in a year. When you reach this threshold, you have a connection! Nexus as a tax concept is not new, but it has made its way into our mainstream media in recent years. First it was the economic presence that made the headlines, then the link with clicks and the Amazon law took their turn. But these issues were only precursors to the South Dakota Supreme Court`s decision against Wayfair. This decision, which we will discuss in detail below, is considered one of the most influential judgments in modern tax history and continues to make waves in state tax law to this day.
Some states specifically address when a distance seller who meets an economic connection threshold must begin collecting, reporting, and remitting sales tax. Other states do not. Some states impose an unrealistic “compliance date” by default (for example, the day after the threshold is reached). Economic presence remains a contentious issue, and more and more States are refining their definitions of economic presence to preserve as much as possible the tax revenues to which they are entitled. And indeed, the Wayfair case is one of the main drivers of the new policies for the economic link. In June 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair that forever changed the sales tax law. What for? The short answer is: Internet sales. Do you remember the first time you bought something on Amazon and realized you didn`t have to pay sales tax? Like many others, you probably thought it was great and didn`t wonder why your purchase was “duty free”.
Unfortunately, the states did not like it. They have been fighting this problem for more than a decade. As of June 2018, however, their hands were tied by the laws surrounding the link. In the scenario described above, Company A has a connection to Georgia because it is located in Georgia. But Business A “gets” a connection to Florida by opening a physical location in the state. Until June 2018, this physical presence standard was the law of the land. If you, your business, employees, inventory, or other items/persons (including independent contractors!) were physically present in a state affiliated with your business and therefore required you to register to collect and remit that state`s sales tax.