Your business likely has a tax filing requirement in a state where you are not currently filing — and perhaps not even setting foot in. One of the most frustrating types of analyses for a business is evaluating whether it has nexus, or potential tax filing requirements, in state or local jurisdictions. Nexus laws are often inconsistent, and even a 1992 U.S. Supreme Court ruling in Quill Corp. v. North Dakota — requiring at least some physical presence of a company before a state tax obligation can be imposed — isn’t helping much. Here’s a look at what some states are doing.
Retailer reporting of use tax obligations was developed by states incensed over the loss of sales tax revenue from online retailers. In Colorado, while retailers without nexus (those who never enter the state) do not have to collect use tax from customers, retailers with more than $100,000 of revenue in the state must report their activity. Non-nexus retailers must:
Explicitly notify customers on each invoice of their use tax obligation,
Send an annual summary of purchases to customers with another reminder about their use tax liability, and
Provide Colorado an annual customer information report summarizing all purchases that year.
Retailers that do not comply may face penalties.
As a result, many have decided that registering and collecting Colorado sales tax from consumers is less costly than complying with the use tax notification requirements. To date, Oklahoma, Louisiana and Vermont have passed similar requirements taking effect in 2016 and 2017.
States continue to expand the economic nexus threshold whereby a non-resident business is subject to a state income or gross receipts tax merely by generating revenue in the state. States have justified this by limiting the application of Quill to sales and use taxes. California, Michigan, New York, Tennessee and Ohio are a few states with such a threshold, which vary by state. For example, Ohio imposes a $500,000 annual state revenue threshold, whereas New York’s threshold is $1 million.
Most recently, and in clear defiance of Quill, South Dakota enacted legislation imposing a sales and use tax collection requirement on non-resident retailers that generate more than $100,000 of state taxable receipts or 200 separate transactions in the current or prior calendar year. The law requires the state to “judicially validate” the concept before applying to all taxpayers. Tennessee took a bolder approach and is fully implementing its sales tax economic nexus provisions in 2017.
Under this practice, once a company establishes nexus, it continues for the remainder of the calendar year and the following year. Washington has implemented trailing nexus, and South Dakota has effectively done the same through its sales and use tax economic nexus provisions.
In the electronic age, taxpayers are up against states continuously monitoring neighboring states’ legislation, court decisions and audit determinations to identify tax-raising opportunities. The only opportunity for standardization among the states is through federal legislation or a U.S. Supreme Court decision clarifying its interpretation of nexus in interstate commerce. Without federal intervention, states will continue to aggressively push the boundaries of which activities create nexus, costing businesses precious time and money to ascertain the requirements and comply.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.