With sales tax revenue dropping due to an increase in not-taxed (but not exempt) internet and catalog sales, a growing number of states have created economic nexus laws. These new and dynamic laws are designed to now tax sales by out-of-state sellers that otherwise lacked a physical presence in the state.
In many states, economic nexus policies have also been created with an eye toward triggering a legal battle that would land on the steps of the Supreme Court of the United States and provide an opportunity for the court to abrogate its decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). For example, the original ruling in Quill upheld the physical presence precedent: that a state cannot impose a tax obligation on a business unless that business has a substantial connection to the state, i.e. a physical presence. Understanding where economic nexus exists and how policies differ from one state to the next is essential for any business that makes sales in multiple states. The eight states below have adopted economic nexus. The other states listed have considered or are considering the adoption of a similar policy.
Alabama economic nexus, January 1, 2016
Alabama was the first state to adopt an economic nexus policy. Department of Revenue Rule 810-6-2-.90.03 took effect January 1, 2016 and holds that “out-of-state sellers that lack a physical presence in the state but make sales of tangible personal property (TPP) in Alabama have a substantial economic presence in Alabama and must collect and remit tax if both of the following are true:
- The seller’s retail sales of TPP in Alabama exceed $250,000 per year (based on the previous calendar year’s sales)
- The seller conducts one or more of the activities described in Alabama Code Section 40-23-68, which includes solicitation of sales through advertising on cable television, and any other contact with the state “sufficient enough to permit Alabama to impose a sales and use tax collection requirement under Code § 40-23-68(b)(9)”
In a less contentious move, Alabama created the Simplified Sellers Use Tax policy to make compliance easier for remote retailers. It “allows eligible sellers to participate in a program to collect, report and remit a flat eight percent (8%) sellers use tax on all sales made into Alabama,” without worrying about the various combined state and local rates.
Indiana economic nexus, July 1, 2017
House Bill 1129 establishes economic nexus for remote vendors in Indiana as of July 1, 2017. Out-of-state vendors lacking a physical presence in Indiana must collect and remit tax on sales to Indiana customers when one of the following is true in the current or preceding calendar year:
- The vendor makes more than $100,000 in gross revenue from Indiana sales transactions
- The vendor makes more than 200 separate sales transactions in the state
Like Alabama, Indiana has created a law it hopes will be challenged. This would create an opportunity for the Supreme Court to overturn its decision in Quill.
Massachusetts economic nexus, July 1, 2017
Effective July 1, 2017, out-of-state internet vendors with significant Massachusetts sales must collect sales or use tax under Massachusetts Department of Revenue Directive 17-1. A remote internet vendor makes significant sales in the state when both the following are true:
- The vendor makes more than $500,000 in sales to Massachusetts consumers
- The vendor makes at least 100 taxable sales transactions for delivery into Massachusetts
The Massachusetts policy differs from the others on this list in that it only applies to internet vendors, not retailers who sell to customers via catalogs or the phone. As a result, the physical presence precedent upheld in Quill doesn’t apply.
North Dakota economic nexus, contingent effective date
North Dakota Senate Bill 2298 creates economic nexus for out-of-state sellers that lack a physical presence in the state but meet one of the following criteria in the current or previous calendar year:
- The vendor has gross sales from TPP and other taxable items delivered in North Dakota of more than $100,000
- The vendor makes at least 200 separate taxable sales transactions in North Dakota
Unlike Alabama and Indiana, the state that was involved in the seminal Supreme Court case, Quill Corp. v. North Dakota, is not interested in another lengthy legal battle. Therefore, the effective date of the economic nexus law is contingent “on the date the United States Supreme Court issues an overturning of Quill v. North Dakota” or other confirmation that “a state may constitutionally impose its sales or use tax upon an out-of-state seller” under certain circumstances.
South Dakota economic nexus, May 1, 2016
As of May 1, 2016, Senate Bill 106 requires remote sellers with no physical presence in South Dakota to collect and remit sales tax as if they have a presence in the state, if one of the two following criteria in the previous or current calendar year is true:
- The remote seller’s gross revenue from sales of TPP, electronically delivered products, or services delivered into South Dakota exceeds $100,000
- The remote seller has 200 or more separate transactions of TPP, electronically delivered products, or services delivered into South Dakota
SB 106 was challenged before it even took effect and is under an automatic injunction during the pendency of the action. Earlier this spring, a state circuit court found South Dakota’s economic nexus law to be unconstitutional, which is what the state wanted: “The South Dakota law was designed to be challenged” because an eventual decision in the state’s favor could require “abrogation of the United States Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).”
Tennessee economic nexus, July 1, 2017
The Tennessee Department of Revenue’s economic nexus rule requires out-of-state dealers to register with the department and report and pay tax on all taxable sales to Tennessee consumers when both the following conditions are true:
- The remote seller engages in the regular or systematic solicitation of consumers in the state through any means
- The remote seller makes sales that exceed $500,000 to consumers in the state during the previous 12-month period
Affected out-of-state sellers were required to register with the state by March 1, 2017, and must begin collecting and remitting sales tax by July 1, 2017, “unless a later date is established by the Department by notice.” Additional information, including FAQs, is available from the Department of Revenue.
Vermont economic nexus, contingent effective date
Out-of-state vendors that don’t have a physical presence in Vermont are required to collect and remit sales tax when they engage in “regular, systematic, or seasonal solicitation of sales of TPP in Vermont” and one of the following is true during a preceding 12-month period:
- The vendor makes at least $100,000 in sales to Vermont consumers
- The vendor makes at least 200 individual sales transactions for delivery into Vermont
Under Act No. 134, a vendor is considered to regularly and systematically, or seasonally, solicit sales in Vermont by: displaying advertisements in Vermont; distributing catalogs, periodicals, advertising flyers, or other advertising by means of print, radio, or television media; or using internet, mail, telephone, computer database, cable, or other communication systems for the purpose of affecting sales of TPP.
Vermont economic nexus will take effect “the later of July 1, 2017 or beginning on the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement of Quill v. North Dakota, 504 U.S. 298 (1992).” Read Vermont economic nexus law hinges on Supreme Court, Congress.
Wyoming economic nexus, July 1, 2017
Under House Bill 19, out-of-state vendors lacking a physical presence in Wyoming are required to collect and remit Wyoming sales and use tax starting July 1, 2017, if one of the following conditions is met in the current or previous calendar year:
- The sellers’ gross revenue from the sale of TPP, admissions, or services delivered into Wyoming exceeds $100,000
- The seller sold TPP, admissions, or services delivered into Wyoming in at least 200 separate transactions
The authors of the legislation expect remote vendors to fight its new economic nexus policy. And like many of the above-mentioned states, Wyoming would relish the opportunity to argue for the repeal of Quill before the United States Supreme Court.
States considering economic nexus policies
- Illinois (see the amendment)
- New Mexico
- Rhode Island
The above references are organic: state sales and use tax policies are always subject to change. And it should be noted that economic nexus policies aren’t the only way states are striving to capture tax revenue from remote sellers. Many states have adopted affiliate and click-through nexus policies, whereby out-of-state sellers establish a substantial connection to the state through ties to in-state affiliates, or when links on an in-state business’s website generate a certain amount of business for a remote seller.
Furthermore, some states have adopted or are considering use tax notification requirements for remote retailers, rather than affiliate, click-through, and economic nexus laws. Use tax notification and reporting requirements such as the one adopted by Colorado require non-collecting remote retailers to notify consumers of their obligation to remit use tax to the state if sales tax wasn’t collected at checkout. Some of these policies require vendors to annually report their sales to customers, and some take it a step further, requiring the vendor to provide the state department of revenue with a list of customers and the total amount of their purchases. In their own way, many of these policies are also designed to challenge Quill.
What you can do to stay in compliance
Businesses need to be vigilant in order to remain in compliance in all states where sales are made.