What Approach Are States Taking Now?
It has been more than a year since the historic Wayfair v. South Dakota Supreme Court decision and all but two states, Florida and Missouri, have responded with some sort of economic nexus regulations. That being said, these two states are expected to have some kind of nexus regulation in place by the end of the year.
While most states have imposed similar sales and transactions thresholds, there still exists a considerable amount of inconsistency in how the rules are applied. Kansas, the latest state to enact economic nexus rules, seems to be looking for a legal challenge. The Sunflower State imposed rules with no thresholds. This means anyone selling in Kansas has nexus and a requirement to collect sales tax, no matter how small the revenue or how insignificant the transaction. According to Kansas regulations, an Ohio seller that ships a “widget” to a single Kansas customer would have nexus and, therefore, a requirement to collect tax.
Without the minimum thresholds, Kansas’ stance seems to be overreaching. Will it stand? We will be monitoring closely.
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Other State Sales Tax Nexus Trends
Enacted marketplace facilitator rules
As of July 1, 2019, 26 states have implemented the marketplace rules. For those who sell exclusively through a marketplace like Amazon or eBay, the marketplace facilitator rules should prove to be helpful. These rules effectively take the burden away from the small internet seller and instead shifts it to the marketplace. However, these rules will not help a seller who sells through their own websites AND a marketplace.
Other types of sales tax nexus standards have been repealed (click through, affiliate nexus, notice and reporting)
Some states are repealing some of the other nexus standards that had been enacted prior to Wayfair in an effort to capture some of the out-of-state seller’s activity. Illinois, for example, announced that its state’s click-through nexus and affiliate nexus rules would no longer be imposed. Pennsylvania and Oklahoma have repealed the notice and reporting regulations in favor of a new economic standard.
A Moving Target
We continue to monitor the daily tax changes as states evolve and reconfigure their rules regarding this issue. While clients may still want to wait and see what happens, there are already cautionary tales out there of the steps states are taking to ensure that sellers are compliant with the new rules.
Notices and nexus questionnaires to determine nexus standings have seen an upticks. State are using technology and resources to start digging, and they are finding sellers. It’s important for businesses to understand that some states expect you to be registered and collecting tax, the moment the business hits the threshold amount. Some states, on the other hand, have been more lenient – giving businesses a three-month period after the threshold has been hit, to register. Regardless of the time frame, there are some states that take the compliance very seriously.
Rhode Island actually has a minimum $10,000 penalty for sellers that fail to comply with its nexus standards. While this penalty seems extreme, you need to be aware that since these new standards have been in effect in some places for more than a year, penalties are, indeed, being imposed in every state for companies that have nexus and are not collecting sales tax and filing returns – and they can undoubtedly be pretty stiff.
We help you by determining whether you have exposure in the state us do business and help you effectively reduce your risk. You can reach out to me directly at email@example.com or email Rea & Associates to speak to a member of our state and local tax team. You can also learn more about our state and local tax services here.
By Kathy LaMonica, Vertex® Certified Professional (Cleveland office)