Physical Presence Requirement Bill Could Upend Sales Tax Nexus Laws
The details of what constitutes a nexus and how to be sure a company is in compliance with sales tax laws have plagued ecommerce retailers over the last few years. However, a new bill was introduced to Congress last week that could overturn these regulations. Entitled the “No Regulation Without Representation Act of 2016,” H.R. 5893 redefines what constitutes a physical presence in any state. It will override existing nexus laws, and impact the ability of state and local governments to collect sales and use tax in these cases.
Currently, each state defines its own standard of what constitutes a nexus beyond actual physical tangible presence, such as having an office in that state. As discussed previously, changing nexus regulations have been a way for cash-strapped states to bring in more income with sales tax. This often means that vague or complex definitions can be in place, presenting ecommerce retailers with the challenge of ascertaining where and when they should be collecting and remitting sales tax. Some of the activities that can create a nexus for online retailers within certain states include affiliate sales programs, hosting trade shows, drop-shipping and third party fulfillment centers.
The new bill limits the definition of a physical presence in a state to only include:
- Owning or leasing tangible property there,
- Having one or more employees in the state that solicit orders or provide services there, or
- Having an office with 3 or more employees in the state.
Additionally, no nexus is created for the following activities:
- If you have a physical presence in that state for less than 15 days a year, for example, only when hosting a trade show.
- Selling products in that state from click through referrals, such as affiliate programs.
- Providing product delivery by common carrier or through fulfillment programs.
- Online advertising that does not target a particular state.
These are vastly different than current definitions and thus, this law would have a profound effect on nexus regulations, making it much easier for online retailers to be compliant with state and local tax regulations. It will also have implications in court cases that are now pending. For example, Alabama changed its nexus rules effective on January 1, 2016 and is already in court with Newegg, Inc., who claims that these rules are unconstitutional. South Dakota is in also in litigation over a similar issue, which involves Newegg as well as other plaintiffs. The passage of H.R. 5893 would make those cases moot.
The bill has already garnered the applause of the TruST Coalition, whose members include American Catalog Mailers Association (ACMA), Direct Marketing Association (DMA), the Electronic Retailing Association (ERA), and NetChoice. This coalition seeks to simplify online sales tax issues for businesses.
This bill is one that all ecommerce retailers should watch closely, including tracking which Congress members support it as the 2016 elections loom near. Should it pass, the law will take effect come January 1, 2017 changing the landscape of nexus sales tax for all ecommerce vendors.