The 2018 South Dakota v. Wayfair, Inc. Supreme Court decision changed how businesses must approach determining whether they are required to register, collect and remit sales tax. Before Wayfair, the question was always whether a company had people (e.g. employees, contractors) or property (e.g. a building or inventory) in a jurisdiction. This was what we called traditional “physical presence” nexus. If you met one of those requirements, then you had physical presence nexus.
Of course, by the time the new millennium rolled around, the question was complicated by concepts such as attributional/affiliate nexus and click-through nexus. Today, while physical presence nexus can still put a taxpayer on the hook, whether a sales tax obligation exists is also one of “economic” connection.
Here are five key questions that you should ask your clients when it comes to both physical and economic nexus, designed to help keep them in compliance and safe from audit risk.
Where are you located?
When it comes to determining physical nexus, brick and mortar locations are not the only factor. As discussed earlier, physical presence nexus is established through people or property. This includes:
- Fulfillment centers
- Inventory locations
- Trade shows
It’s a common misconception that economic nexus standards have eliminated the need to consider physical presence. This is simply not true. Physical presence nexus standards exist in every state that has a sales tax. A single employee in a state could create an obligation to collect and remit sales tax, regardless of how much business a company conducts there. When considering their physical nexus footprint, also consider where their inventory may sit, even temporarily, before being delivered to customers. Also think about whether company employees travel to meet clients, conduct repairs or make sales. All these activities could create a sales tax compliance obligation.
What is your transaction volume?
When South Dakota brought its case to the Supreme Court, it was defending an economic nexus standard holding that if a seller conducted 200 or more individual transactions into their state, they were obligated to collect their tax. Once the case was decided in their favor, many states rushed out and enacted standards copying South Dakota precisely.
In the intervening years, nexus criteria surrounding transaction volume has fallen a little out of favor, but they definitely still apply in many states and for companies that sell high volumes of inexpensive items, the threshold can be passed pretty darn quickly.
What is your revenue?
South Dakota’s standard also created a sales tax obligation once a company exceeds $100,000 in gross sales and again, many states moved to adopt identical standards. However, this criteria has likewise evolved, with some states adopting a larger “gross sales” threshold and others opting not to count “gross” sales but rather “taxable” sales or non-wholesale sales. The nuances can be subtle and understanding what to count and how to count revenue in each state is critical.
Do you need a periodic review?
Businesses change, evolve and adapt, and those changes can frequently impact a company's nexus profile. For example, during the pandemic many organizations embraced the concept of a remote workforce and as we discussed above, employees immediately create physical presence nexus. While a handful of states adopted emergency rules stating that temporary remote employees would not in and of itself create new compliance obligations for companies, a permanently remote workforce stretching across multiple states can lead to expanded nexus. A similar review is warranted to account for new sales channels, acquisitions and changed practices. Ideally, as an advisor you know of organizational changes before they happen, but practically you may be called upon to react quickly to evolving circumstances to keep your clients safe.
With respect to both the volume and revenue thresholds, most states hold that once a seller crosses it, the obligation to be sales tax complaint applies immediately. A wise advisor may suggest a client register now, rather than spend the time and effort needed to monitor their sales closely and react once they cross.
Have you considered the Streamlined Sales Tax (SST) Program?
If you have clients facing expanded compliance requirements because of economic nexus standards across the country, the Certified Service Provider (CSP) program offered by the member states of the Streamlined Sales Tax (SST) Governing Board can potentially make compliance substantially more manageable and affordable. SST is an organization composed of 24 state governments that have worked together for the last 20 years to modernize and simplify sales and use tax. The states recognized early on that one of the keys to simplification lies in compliance software. With that in mind, they have certified several technology providers that are allowed to offer sales tax solutions to sellers, with compensation coming directly from the states and not the pockets of your client.
At one time, SST required that sellers using the CSP program register in all 24 member states at once, but that is no longer the case. Sellers can opt to register in as many states as needed to start and then register for the rest when the time is right. Even companies that have already registered for sales tax can take advantage of this program, so long as they meet the basic eligibility requirements. Read more details about the SST program and CSPs here.
Nexus analysis and review is essential for businesses of all sizes. As post-pandemic business changes take root and since economic nexus standards have been on the books in many states for three years now, you can expect state enforcement to move into full swing. We now live in a world where every state that has a sales tax has both physical and economic nexus requirements and the time to develop a comprehensive compliance plan is now.