When states began instituting sales taxes in the middle of the 20th century, the vast majority of sales were of physical items sold from brick-and-mortar stores, and so the laws were structured around that arrangement. Over time, of course, the way we shop and make purchases, as well as what we’re buying, have evolved dramatically. One major shift has involved an increase in the share of the market taken up by the purchase of services, and this has resulted in the addition of many services to state sales tax statutes. One such recent change is economic nexus.
Another major change has involved purchases made over the internet, and the growing percentage of total sales to customers in a state that this makes up will only grow larger over time. Because of this, many states have been trying to find ways to include remote sellers in groups that must collect and remit sales tax on purchases to customers within the state. The ability to do this, however, relies on the seller having some sort of significant presence, or nexus, in the state, and without that, courts have ruled that it’s unconstitutional to require those sellers to comply with sales tax regulations.
The Economic Nexus Argument
The Constitution, like many sales tax laws, was written long before the internet came into being. Because situations are so different today, many states have been exploring different ways of claiming a nexus exists based on a substantial economic presence even if there is no physical presence within the state. Although the specifics vary somewhat from state to state, a traditional nexus generally requires a physical store or other place of business, goods stored in a warehouse, or some representatives or agent working for the seller within the state.
Different states have structured their economic nexus statutes in a variety of ways, but in general, they all require a certain minimum dollar amount in total gross receipts or a minimum number of separate transactions over a 12 month period, which they feel shows a significant relationship between the seller and customers within the state.
Quill Corp v North Dakota
One major obstacle to states attempting to enacting economic nexus laws is the Supreme Court decision handed down in 1992 in the case of Quill Corp v North Dakota. This case involved the Quill Corporation, which was a supplier of various types office supplies and equipment with a number of customers in North Dakota but no physical presence there. However, some of Quill’s customers in North Dakota used proprietary software to place their orders, and so the state argued that this constituted a nexus and tried to compel the company to collect and remit sales tax on purchases by North Dakota customers.
The Supreme Court rejected that argument, and they specifically left it up to Congress to legislate the issue. Broad legislation never came into being, but because situations have changed so dramatically since that decision was handed down, there has been a recent push by states to enact laws to challenge that decision and bring another case before the Supreme Court. In fact, South Dakota has a case at the moment that is working its way through the court system, and there are several states with economic nexus laws that have passed the legislature but that can’t go into effect until the Quill Corp v North Dakota decision is overturned.
Current Economic Nexus Laws
There are currently five states with economic nexus laws in effect or going into effect this year. They include:
Effective 1/1/16; requires seller to collect sales tax when total sales of real personal property to Alabama customers are more than $250,000 in the previous calendar year, and at least one of the following:
- Has a physical office, warehouse or store, either directly or through a subsidiary
- Registers with the state to collect sales tax
- Has an agent or representative on contract in the state
- Advertises in the state through a contract with a broadcaster or publisher to solicit orders
- Uses the mail to solicit orders on a substantial and recurring basis
- Benefits from marketing, banking, financing, or debt collection activities in the state
- Has a franchising agreement with someone in the state
- Solicits orders through a contract with cable TV providers
- Solicits orders through a telecommunications or television shopping system broadcast in the state
- Receives orders through catalogs or other advertisements distributed in the state
- Maintains some type of contract with the state that requires the collection and remittance of sales tax
Effective 7/1/17; a seller must register to collect and remit sales tax if:
- Their gross revenue from sales of tangible personal property delivered into the state, products transferred electronically to customers in the state, or services delivered to Indiana customers is $100,000 or more in a year; or
- Their sales of tangible personal property, products transferred electronically, or services delivered into the state occur in 200 or more discrete transactions
Effective 7/1/17; remote sellers must collect and remit sales tax to the state if during the preceding 12 months:
- they had gross receipts totaling $500,000 or more; or
- they had sales of taxable goods into the state in 100 or more individual transactions
Effective 9/1/15; this provision applies only to the Business and Occupation (B&O) tax for out-of-state sellers making wholesale sales into Washington. These sellers must collect and remit tax on qualifying purchases if during the preceding year, they:
- Had more than $53,000 of property in the state, including the average value of both physical and intangible property owned, rented, or used in the state
- Had more than $53,000 in payroll in the state
- Had more than $267,000 of total sales in the state
- Had at least 25% of total property, total payroll, or total receipts in the state
Effective 7/1/17; sellers who don’t have a physical presence in the state are required to collect and remit sales tax if, in the current or preceding year:
- Their total sales of tangible personal property, admissions, or services delivered into the state were more than $100,000; or
- They made sales of tangible personal property, admissions, or services into the state in 200 or more discrete transactions;
This law also stipulates that the state can initiate action against a remote seller who fails to register to collect sales tax after meeting one of these thresholds
More on the Horizon
In addition to these five states, Tennessee, Vermont, North Dakota and South Dakota all have laws that will go into effect pending the outcome of various court cases. As online sales expand their market share, it seems likely that this trend will continue. While the specific rationale used to justify these laws and the precise sales and transaction thresholds may vary somewhat from state to state, they all follow the same basic pattern, and this is something to keep in mind for anyone making remote sales into these and other states.