Since the U.S. Supreme Court’s 2018 decision in the South Dakota v. Wayfair, Inc. case, states have continued to update their statutes to assess and collect sales tax from out-of-state sellers, specifically, online retailers. In a nutshell, the Supreme Court agreed that out-of-state sellers who met certain thresholds had nexus in South Dakota and thus, South Dakota could collect sales tax from them. So, what’s happened since the June 21, 2018, decision?
The thresholds, also called economic nexus standards, in the South Dakota statute are:
A business’s sales into South Dakota exceed $100,000 for the year, and/or
A business has 200 or more separate transactions to customers in South Dakota for the year.
What’s Happened Since the Decision?
Multiple states have changed their statutes to follow the South Dakota economic nexus standards, or a modified version of them. As of June 2019, more states have economic nexus standards than states that do not. Sales tax compliance has become more cumbersome for online retailers.
One state making the shift to economic nexus standards is our own home state of Pennsylvania. Effective July 1, 2019, online sellers whose PA annual gross receipts exceed $100,000, will need to register, collect, and remit PA sales taxes. Note that PA only has only the $100,000 sales threshold; it did not adopt the 200 transactions threshold.
A key to remember is the Wayfair case only addressed sales tax. Online retailers of tangible goods are still protected from income taxes under the Federal Public Law 86-272, which prohibits states from assessing income taxes on out-of-state sellers whose only activity in the state is the solicitation of sales. More plainly, physical presence (or some other nexus-creating activity) is still required before a state can impose an income tax on a business selling tangible goods. Seems straight-forward, right? Of course not!
Several states have taxes that are not based on income: gross receipts taxes, business privilege taxes, franchise taxes, etc. Public Law 86-272 does NOT protect a business from these non-income-based taxes. Thus, if a state with a non-income-based tax adopts economic nexus standards, online retailers meeting those standards will be subject to these taxes. Some examples include the Alabama Business Privilege Tax, the Ohio Commercial Activity Tax, the Texas Franchise Tax (as of 10/1/19), and the Washington Business & Occupation Tax.
To make matters worse, this could also apply to taxes assessed by cities. Philadelphia’s Business Income & Receipts Tax (BIRT) assesses tax on a business’s net income at one rate and on a business’s gross receipts at another rate. As of 1/1/2019, Philadelphia adopted the $100,000 sales economic presence threshold. Now, businesses lacking physical presence in Philadelphia, but selling goods over $100,000 to Philadelphia customers will be deemed to have nexus and subject to the gross receipts portion of the BIRT.
Confused yet? The state tax implications resulting from Wayfair are complicated. Sifting through each state’s slightly different nexus rules to determine how it impacts your business can be a huge undertaking. Reach out to The Tax Warriors® at Drucker & Scaccetti with questions about your multi-state tax situation. We can help make this less daunting for you.