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We talk a lot about nexus and compliance processes in our content, but what about marketplace...
The concept of economic nexus is always evolving, thanks to constant shifts in state and federal law. It can be difficult for companies to keep up with these changes. Since failures to recognize these changes can lead to financial penalties, it is imperative that companies keep track of their obligations to the different jurisdictions in which they do business.
“Nexus” means that a company has a substantial enough connection to the jurisdiction in question, which allows the jurisdiction to force the company to adhere to its sales tax rules. If a company is determined to have nexus, it is obligated to collect and remit any applicable sales and use tax in this jurisdiction.
Each state has a different method of determining whether a company has nexus. In the past, nexus has been defined as a “sufficient physical presence” only. There are many ways in which a company can have a physical presence, including brick-and-mortar locations and sales representatives doing business in the area. In certain states, businesses were also considered to have physical nexus if they put tracking cookies on customers’ computers. In 2018, economic nexus was added as an additional way that a business can create nexus with a taxing state or jurisdiction.
Most states were eager to tax online revenues in their jurisdictions. A landmark U.S. Supreme Court decision was reached in 2018. South Dakota vs. Wayfair upended the nexus concept, stating that companies with no physical presence were obligated to pay South Dakota sales tax as long as they met particular transaction and revenue thresholds.
The Wayfair case centered around whether a state could collect revenue from a business not located within its borders. To determine the state’s eligibility, the Supreme Court turned away from its Commerce Clause, a set of historical regulations which has been disputed in recent years. Wayfair was estimated to remedy losses from $48 million and $58 million in untaxed revenues for the state of South Dakota.
The physical nexus standards prior to South Dakota vs. Wayfair are an uneven patchwork of complex rules determined by each state. Today, all states with a state-wide sales tax have enacted laws associated with economic nexus.
Even with the new economic nexus rules in place, companies should not forget about a potential physical presence. A company can have either a physical presence OR an economic presence. Either of which creates sales tax nexus. While the economic nexus rules tend to be more straight forward, companies need to be aware that the requirements for determining whether a company has a physical presence in a jurisdiction vary widely by state. The key US Supreme Court decision governing physical presence nexus was Quill Corporation vs. North Dakota in 1992. In the decision, the Supreme Court found that North Dakota had no right to impose a sales tax collection obligation on Quill Corporation, a catalog merchant with no physical presence in the state. States were disappointed with this ruling, especially as the growth of online sales through the 2000s meant that much more tax revenue was being lost.
Physical presence requirements include owning or leasing any brick-and-mortar facility in the state and sending sales representatives into the state. Storing property in a state can also lead to physical nexus, as in the case of Amazon warehouses.
Employees participating in trade shows in the state can lead to nexus also. Service technicians performing calls in another state are also part of determining nexus. Affiliate or agent relationships supporting servicing or selling activities are also included.
Massachusetts pioneered the concept of “cookie nexus,” meaning that any company that puts cookies on a customer’s computer could be considered to have physical nexus within the state. Ohio adopted similar regulations, but they have since been repealed. In Massachusetts, the cookie nexus requires that companies with more than $500,000 in internet sales and over 100 transactions collect sales tax on the state’s behalf.
"Cookie nexus" laws have somewhat fallen by the wayside in favor of economic methods of determining nexus.
The provisions of South Dakota vs. Wayfair allowed the state to collect sales tax from companies with at least $100,000 in gross revenue sourced to the state of South Dakota. South Dakota also imposed a 200-transaction threshold on out-of-state sales. For example, if a company had $99,000 in sales in South Dakota and 300 transactions, they would still have to collect and remit sales tax in South Dakota.
Many states have followed suit, instituting their own thresholds for out-of-state revenue and transactions. While most follow South Dakota’s lead, there are some differences.
Alabama: In-state sales in excess of $250,000; no provision for a number of transactions
Iowa: Gross sales to the state over $100,000; no annual transaction threshold
Massachusetts: $100,000 sales; no transaction threshold
Mississippi: $250,000 sales; no transaction threshold
New York: $500,000 sales AND 100 transactions
Oklahoma: $10,000 sales must comply with the notification requirements or register to collect and remit sales tax
The penalties for failing to file and remit state sales tax can be severe. Both civil and criminal statutes can apply.
Civil statutes mainly apply to failure to file and failure to pay. Many states levy a percentage of the total sales tax due, ranging from 1 to 25 percent. In this case, failure to file and failure to pay are considered separate violations, and each penalty will be assessed individually.
Criminal statutes carry more serious penalties. Criminal penalties could apply if your company failed to pay any tax with the intent to evade the payment or if you have collected sales tax but not remitted it. Penalties also apply to the filing of a knowingly false return.
Keeping track of these regulations and their annual changes can be difficult. A specialist like TaxConnex can help determine precisely how much tax your company owes to the various jurisdictions in which it does business. Failing to comply with sales tax nexus can open companies up to costly lawsuits and fines.
Understanding the concept of nexus can help companies preserve their revenue and encourage compliance with state and local laws. When your company contracts with a specialist, you will better understand where and how you should collect and remit sales tax. Give us a call at 877-893-5804 with any questions you may have regarding nexus or how to maintain your on-going compliance.