The ‘Nexus Monday’ blues
“Nexus Monday” – the date on which the economic nexus laws of 10 states came into effect – was Oct. 1, 2018. But just in case some businesses didn’t get the message, a number of states sent little reminders to online retailers that might be affected.
“Somehow, somewhere, there is a list that all these states have that they are using to send letters to online retailers,” said Scott Peterson, former executive director of the Streamlined Sales Tax Project and currently vice president of U.S. tax policy and government relations at Avalara. “Otherwise, how would one company, one of our customers, get letters from three states, almost in the same day, reminding them of the date that the state expected that company to start collecting sales tax? I don’t know how they got the list or where it came from, but we’re seeing the logical outcome of these economic nexus laws being passed.”
By the end of the year, 28 states will have passed economic nexus laws, and Peterson expects such laws to be in every state by July 1, 2019.
All 10 states whose laws went into effect on Oct. 1 have a threshold modeled after that of South Dakota’s $100,000/200 transaction threshold that the Supreme Court assented to in Wayfair. Those states are: Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, North Dakota, Washington and Wisconsin.
But there are issues with larger states using the same threshold, according to Peterson.
“When they were defending the $100,000 threshold in the brief they submitted to the Supreme Court, South Dakota estimated that a company selling $100,000 within the state was a $30 million company [i.e., would sell $30 million nationwide],” said Peterson. “But South Dakota has 800,000 people. Logically, if State X has three times that number, its threshold should be three times larger.”
“And what about Illinois, with 12 million people?” Peterson asked. “It put into place the same small seller threshold that South Dakota did.”
John Biek, co-chair of the taxation practice group at Chicago-based law firm Neal Gerber & Eisenberg, agreed.
“Illinois arguably should have imposed a higher gross receipts or transactional threshold than the South Dakota standard because it is a more populous and commercial state than South Dakota,” said Biek. “But the constitutional question of whether the Illinois nexus statute unduly burdens interstate commerce will have to be resolved in further litigation.”
“Retailers should expect state agencies to be more aggressive in asserting that out-of-state taxpayers have nexus for state sales, use and income tax purposes,” added Eric McLimore, an associate in NG&E’s taxation practice group.
“Once every state has a threshold, we should be able to take the individual thresholds and calculate a nationwide definition of a ‘small seller,’” Avalara’s Peterson said.
“For CPAs that advise small sellers, there are only a few steps that must be taken, but the challenge is that a couple of steps are time-consuming,” he said. “One of the steps is getting a license. There is a legal presumption in state sales tax law that you aren’t collecting state sales tax until you get a license. They presume there’s a logical order – that you’ve done this in a methodical way and have done it before you open your doors.”
“The pool of people that are impacted by this is enormous – there will be thousands of sellers that are not in compliance,” he added.
It used to be that a seller could determine where it had physical presence, Peterson observed. “Now, it’s the customer that determines nexus. And note that both South Dakota and Hawaii tax accounting businesses,” he said. “So CPA firms with clients in one of those states are in the same boat.”
“Don’t panic,” concluded Peterson, who was director of sales tax for South Dakota for 10 years. “Call your CPA and figure a way of sorting out all your sales by state. That’s the only way you can make an informed decision as to where you should start collecting. Any retailer that doesn’t collect everywhere has to do that.”