By Terry Barrett, CPA, Tax Senior Manager
By Terry Barrett, CPA, Senior Tax Manager | State and Local Tax Team Leader
Last summer the U.S. Supreme Court ruled in South Dakota v. Wayfair, US S. Ct., Dkt. No. 17-494, 06/21/2018, that remote sellers could be required by the states to collect sales/use tax on sales to instate residents even when the sellers had no physical presence in the state. Remote sellers are not limited to sellers of goods through the Internet but also include sellers of goods, whether by phone, fax, catalog or otherwise, and providers of services that have no physical presence in the state but are merely making sales or providing services to instate residents. Since the Wayfair decision a majority of states have adopted remote seller sales/use tax collection obligations.
Also since the Wayfair decision economic nexus rules have been adopted by some large cities in the United States, seeking to expand their reach to remote sellers and service provider with sales activities within their city limits.
San Francisco: New Economic Nexus Rule
Effective January 1, 2019, and after approval in a voter referendum in November 2018, San Francisco has adopted an economic nexus rule imposing the City’s various tax requirements on remote sellers and service providers with $500,000 or more in annual gross receipts from sales and services provided to customers in the City. Previously, businesses were subject to the City’s taxes if they maintained a physical presence in the City, whether through a fixed place of business, by utilizing the streets of San Francisco, or through employees or representatives rendering services or soliciting business for more than seven days during the year. That physical presence no longer is required.
Businesses meeting the economic nexus threshold are required to register with the City (and pay the registration fee) and then determine which of the City taxes that may be applicable. These taxes may include, but are not limited to the gross receipts tax, payroll expense tax, Homelessness Gross receipts tax, etc.
Philadelphia: New Standards for Business Income and Receipts Tax
The City of Philadelphia recently proposed new standards for its Business Income and Receipts Tax (BIRT) in revisions to its Regulation 103. The changes were proposed on January 25, 2019 and will become effective after a 30 day inspection period. The proposed changes provide that beginning on and after January 1, 2019, new economic nexus requirements generally apply to taxpayers who have generated at least $100,000 in City gross receipts during any 12-month period ending in the current year, and have sufficient connection with Philadelphia to establish nexus under the U.S. Constitution. The regulation explains that changes are due to reflect the Wayfair decision since in Wayfair, the U.S. Supreme Court determined that “businesses’ economic and virtual connections to the taxing jurisdiction are sufficient to create constitutional nexus.”
The BIRT has both income tax and gross receipts components. Philadelphia’s regulation traditionally has applied an active presence standard to determine whether a business is subject to the BIRT. Previously the regulation provided protections from taxation similar to those offered by Public Law 86-272 (prohibiting the imposition of an income tax when the taxpayer’s activities in the jurisdiction are limited to the solicitation of orders for tangible personal property where the orders are accepted and filled from outside the City). However, revisions to the regulation suggest that an “active presence,” generally defined as purposeful, regular and continuous efforts in Philadelphia in the pursuit of profit or gain and the performance in the City necessary to those pursuits, will subject a taxpayer to the gross receipts portion of the tax. Activities rising to the level of “solicitation plus,” however, will subject a taxpayer to both the gross receipts and income tax provisions. “Solicitation plus” involves activities beyond solicitation.
What Locality will be Next to Jump on the Economic Nexus Bandwagon?
Regardless, it is incumbent on businesses to not only monitor and determine their sales by state activity to identify where they may have sales/use tax obligations but also their sales by major metropolitan area in order to gauge potential local tax obligations. Physical presence no longer dictates potential state sales/use tax obligations and some local business tax obligations.
Also, the above confirms the need to possibly be selective as to customers. While a large engagement with a San Francisco based business may be very attractive from a revenue perspective, from a compliance perspective it may present too many challenges and not be worth it if the business has to register with the California Secretary of State, register for and collect sales tax, file California franchise tax returns, register with the City of San Francisco, pay the various San Francisco city taxes, etc.
State and local tax continues to become more and more complicated and confusing. We can help you navigate the complexities. Contact your Keiter representative or reach out to our State and Local Tax team with questions and for assistance.
Additional State and Local Tax Resources:
Tax Season: Another Level of Complexity in Virginia?
Virginia Tax Credits for Individual and Corporate Taxpayers
About the Author
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.