On Thursday, June 21, 2018, the U.S. Supreme Court overturned the 1992 Quill physical nexus decision and made economic nexus the new norm.
What is economic nexus?
The Supreme Court ruling redefines nexus as having a business presence based on the dollar amount or number of transactions you deliver to a particular state. For example, South Dakota who challenged the Quill ruling and won, states that you have economic nexus if you have 200 transactions or have products or services of $100,000 or more delivered to South Dakota. Currently, 20 states have economic nexus laws in effect. Some of those 20 states have laws written very similar to South Dakota. That is significant because the Supreme Court specifically referenced the way South Dakota defined their economic nexus.
By the way, this doesn’t just apply to physical goods. Many states tax digital goods.
Before you confidently say none of those states will find you, please keep reading.
How can a state revenue department find you?
- Several states have filed lawsuits to force Amazon to release lists of sellers, amount of sales, and location of inventory. Amazon initially fought these requests and lost. It is likely more states will make these types of requests of Amazon and the other marketplaces (Etsy, eBay, etc.)
- A customer or supplier is audited and it is found you didn’t charge them sales tax or didn’t either charge you sales tax or obtain a resale certificate. You are now on their radar and it is quite possible you will be audited next.
- You worked hard to build an online presence. Are you positive all those abandoned carts on your website are true customers? Could they be a department of revenue staff member checking to see if you are properly charging sales tax? Yes.
- Could an angry customer, employee or competitor report you to a department of revenue for not collecting sales tax? Yes, they can. It’s happened.
What shouldn’t you do?
Should you run out and register to collect and remit sales tax in each state that has an economic nexus law? No. Registering to collect sales tax in a state can also make you liable for other taxes (income, excise, etc) and require registration with the secretary of state (initial fee and annual fees). Careful analysis and intentional decisionmaking are called for here.
Should you sit back and wait to see if any of the states contact you? No. The ability to participate in voluntary disclosure or amnesty programs to have all or most of the penalties and interest forgiven usually goes away if the state finds you first.
Receiving a nexus questionnaire can easily mean you’re about to be audited, especially if you don’t have a very, very good reason for not being registered in that state. Remember, the burden of proof is on the taxpayer and tax law is not written to favor you or your business. Tax laws are meant to fill the bank account of the tax authorities.
What should you do?
What you should do right now is get your bookkeeping up to date and gather the financial facts. If you are not using a tool like Quickbooks Online or Xero, it’s time to get serious. (Note: I do not advocate using Freshbooks, Harvest, Wave, or spreadsheets as an accounting solution. They are not true accounting solutions.)
The most important report you need right now is gross sales by ship to state. This can be a difficult report to get and using a tool like TaxJar can help you quickly gather this information. Note that you need gross sales that include sales from all platforms you are selling on. All of them. Once you have this information, it’s time to dig in and analyze it to determine your risk (and risk tolerance) and next actions. What’s your risk tolerance? If the thought of a $5,000 audit assessment makes you want to lose your lunch, you should probably take action now.
Note that each state with an economic nexus law has set their own sales volume and transaction count threshold. A state by state analysis is required.
In conclusion
The states have been waiting many years for this moment. It is generally believed states will immediately begin aggressively enforcing their economic nexus laws. Yes, there will be more litigation around this, but I doubt that will prevent the states from enforcing their nexus laws. The time for procrastinating learning what your sales tax obligation is has ended. Schedule your free strategy session now.
