States Expand Sales Tax Collection Requirements

Historically a taxpayer selling tangible property was not required to collect a state’s sales tax unless the taxpayer had “nexus” within the state. Nexus is generally defined as a “connection to the state”. My prior blog discussed the changing concept of nexus: Do You Meet the Newest Invisible Tax Filing Requirement?. The landmark 1992 Supreme Court case of Quill v. North Dakota established a physical presence standard. For a state to impose an obligation for a taxpayer to collect sales tax, the taxpayer must have a physical presence within the state. In recent years to generate new sources of tax revenue states have sought to expand the concept of nexus far beyond the physical presence test. These new standards look at economic nexus. 

States have enacted various laws imposing an obligation for taxpayer’s to collect sales tax even if they do not have a physical presence in the state. Unfortunately, the Supreme Court has not addressed this issue since 1992 and the retail sales environment in the US has changed significantly since then. With the growth of online sales, taxpayers can conduct business in multiple states while having a physical presence in only one. The Government Accountability Office estimates that in 2017 states could have collected an additional $13 billion of tax revenue if the physical presence test was not required.

A case that directly addresses this issue will be heard by the Supreme Court this year. South Dakota v. Wayfair Inc. concerns the state’s 2016 sales tax statute that defines nexus to be: “in the current or prior calendar year sales of over $100,000 delivered to the state or over 200 transactions for products delivered to the state”. The state supreme court found the statue unconstitutional under the 1992 Quill decision. On January 12 the US Supreme Court granted certiorari to hear the case. A decision may be rendered by June. Both traditional retailers and internet sellers were hoping the court would hear the case so the question of economic nexus could be decided. Unfortunately, there is a possibility the Supreme Court may simply reaffirm the Quill decision and leave any modernization of the law to Congress but three current justices (Thomas, Gorsuch and Kennedy) have expressed doubts about the applicability of Quill in today’s retail environment. Currently, additional challenges to the Quill physical presence test are pending in Alabama, Tennessee, Wyoming, and Indiana state courts.

South Dakota is not alone in trying to expand the definition of nexus. Recently other states have also adopted an economic nexus standard with a bright-line definition of nexus:

  • Massachusetts: Beginning July 1, 2017 adopts a $500,000 and 100 transaction test. Interestingly, the state only seeks to apply these rules to “internet vendors” as the Department of Revenue is taking the position that the Quill standard only applies to “mail order” sellers and not “internet vendors”.
  • Mississippi: Effective December 1, 2017 the state adopted an economic nexus standard requiring in state sales over $250,000.

Several other states (Connecticut, Colorado, Vermont, Louisiana and Puerto Rico) are taking a different approach to avoid the physical presence standard. These states are requiring out of state retailers to provide to the state’s taxing authority an annual statement identifying each in-state purchaser and showing the total amount of purchases made by such purchaser during the preceding calendar year.

With states acting independently and in many cases in contradiction to the Quill case federal guidance is definitely needed. Since Congress has not taken any action in this area it is now up to the Supreme Court to act.