By Terry Barrett, CPA, Tax Senior Manager | State and Local Tax Team
Remote Sales Tax Collection Requirements
As many of you know, in June 2018, the U.S. Supreme Court issued an opinion that impacts virtually all businesses. The Court ruled in South Dakota v. Wayfair that states may require remote sellers with no physical presence in the state to collect sales/use tax on sales to customers in their states. The tax collection requirements are not limited to internet sellers. Rather, they apply to all sellers of tangible goods and providers of taxable services whether by phone, fax, mail order, internet, or otherwise, that meet the states’ threshold requirements.
Economic Nexus Thresholds by State
Already thirty-eight states have adopted rules imposing remote seller tax collection obligations. Some states are even reconsidering their thresholds/approaches and have legislation pending. California is considering legislation that will raise its economic nexus threshold from $100,000 to $500,000, with no transaction threshold. Georgia is considering legislation that will lower its economic nexus threshold from $250,000 to $100,000 and eliminate its notice and reporting option.
In Virginia, legislation adopting economic nexus thresholds has passed the General Assembly and is awaiting the Governor’s signature. The Virginia legislation, like most other states, requires remote sellers with annual sales of more than $100,000 or 200 separate transactions within Virginia to register for collection of the tax. Virginia’s law also applies to marketplace facilitators. Staying current with all these requirements is critical if a business has customers in other states. Previously the concern was only if the business had a physical connection to a state.
Many of these remote seller obligations are already in effect; others will be effective later this year. The following illustrates the effective dates of the economic nexus provisions. If a state is not listed it has not yet formally adopted economic nexus provisions:
- Effective dates prior to October 1: Hawaii, Maine, Massachusetts, Mississippi, Ohio, Oklahoma, Pennsylvania* (notice or tax collection option if over $10,000 in sales), Rhode Island, Vermont
- Effective dates of October 1: Alabama, Illinois, Indiana, Kentucky, Michigan, Minnesota, North Dakota, Washington, Wisconsin (note: Maryland’s effective date is October 1 but rather than have that the date on which sellers must collect the tax, Maryland reports that is the date sellers need to begin keeping records to determine when they meet the threshold requirements)
- Effective dates of November 1 – December 1: Colorado, Connecticut, Nevada (effective 10/1, but tax collection required beginning 11/1), New Jersey, North Carolina, South Carolina, South Dakota
- Effective dates of January 1 and later: District of Columbia, Georgia, Iowa, Louisiana, Nebraska, New York, Utah, West Virginia – all Jan. 1; Wyoming (2/1/19), California (4/1/19), Texas (10/1/19); Pennsylvania* (if receipts over $100,000 subject to collection requirements 7/1/19; if under $100,000, currently may collect or be subject to notice/reporting requirements)
Economic Nexus Requirements on Taxable Services
As noted above economic nexus requirements affect not only sellers of tangible goods but also providers of taxable services. Most states tax more services than does Virginia. Thus, one cannot assume that if they are providing services to customers in other states, they are exempt from potential economic nexus requirements – that certainly is not the case. Also, it is important to note that the states’ vary as to what sales are included in their thresholds: they may include taxable sales or gross sales (including sales to exempt entities or sales of nontaxable product/services). Sellers who sell primarily at wholesale but who have a small number of retail sales may be subject to state sales/use tax obligations even if they have minimal tax to report.
Other state sales/use tax requirements such as those relating to “click-through nexus,” notice and reporting, affiliate nexus, etc., have not gone away with the new economic nexus focus. These requirements generally apply to businesses that do not yet meet the economic nexus requirements and should not be ignored.
It is noteworthy, too, that with the approval by the Supreme Court of economic nexus for sales/use tax purposes the possibility that states and localities may impose economic nexus provisions for other tax types increases. Already a majority of states have economic nexus rules for income tax. With the Wayfair decision, it is anticipated states may more aggressively enforce such rules. Further, if a business needs to register in a state for sales tax purposes that often requires registration with the state’s Secretary of State. Secretary of State registrations may trigger income/franchise tax requirements.
Some localities have jumped on the economic nexus bandwagon. For example, Philadelphia recently announced that for tax years beginning January 1, 2019, an economic nexus standard has been added for its Business Income and Receipts Tax (BIRT). This means that even if a business does not have a physical presence in the City, it will be subject to the BIRT if the business has generated at least $100,000 in Philadelphia gross receipts during any 12-month period in the current year. In San Francisco, economic nexus rules now apply to most of their business taxes (e.g., gross receipts tax) for remote sellers (of product and services) with $500,000 in receipts (even if no physical presence) from San Francisco sources. Thus reinforces the need to consider where customers are located in determining potential state and local tax requirements. Again, it is no longer just about where the business or its employees have a physical presence.
Additional State and Local Tax Resources:
- Virginia Passes Tax Conformity: What You Need to Know
- Wayfair Decision: Impact on San Francisco and Philadelphia Business Tax
- Investing in Virginia Businesses? Learn About the Tax Benefits.
- Virginia Tax Credits for Individual and Corporate Taxpayers
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.