The Physical Presence Standard: Quill Corp. vs. North Dakota
The physical presence rule had previously determined nexus for sales tax. Per the rule, a business is responsible for collecting and remitting sales tax for the respective state only if it has physical presence in that state e.g. an office, a store front, or a warehouse within state boundaries. This rule was established per the Quill Corp. vs. North Dakota ruling back in 1992. While the ruling relieved out of state E-Commerce businesses from the responsibility of collecting and remitting sales tax, it resulted in loss of sales tax revenues for the states and further put in-state brick and mortar retailers at a disadvantage. The rapid growth in E-Commerce further aggravated the loss of sales tax revenues.
The Economic Nexus Paradigm: South Dakota vs. Wayfair
Concerned about the erosion of its sales tax base and loss of state funding, the South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State.” This economic nexus rule requires that sellers collect and remit sales tax if on an annual basis they:1. Deliver more than $100,000 of goods or services into the state OR2. Engage in 200 or more separate transactions for the delivery of goods or services into the state. Wayfair, Overstock.com and Newegg combined to petition against South Dakota. The Supreme Court on June 21st, 2018 ruled in favor of South Dakota thereby setting a landmark ruling that opened the flood gates for an economic nexus based sales tax regime. Almost all US states now have economic nexus rules.
What does this mean for E-Commerce businesses?
The economic nexus thresholds need to be closely monitored by e-commerce businesses (and businesses selling across state lines). If you exceed the respective state’s threshold for sales, transaction volume or both, you will need to collect and remit sales tax for that state even if you don’t have a physical presence there. Most states have set an economic nexus threshold of $100K or 200 transactions per calendar year; however every state’s economic nexus rules vary and the state specific rules need to be monitored and interpreted accurately to ensure compliance.
How can SalesTaxRX help?
– Assessment of Economic Nexus: We review your historical sales data and perform an economic nexus study, to assess the states in which you are impacted by the economic nexus rules.
– Sales tax registration: For the states wherein you exceed economic nexus thresholds, we process the registrations and obtain the sales tax certificates.
– Ongoing sales tax compliance: We prepare and file your sales tax returns on an ongoing basis. If economic nexus thresholds are exceeded in several states, we can optimize sales tax filing by setting you up on an automated sales tax reporting and filing platform, and manage the filing of sales tax returns on an ongoing basis.