Economic Nexus for Sales Tax is Getting Old

For some of you, the entire discussion of sales tax may be getting old. However, what I am referring to are the effective dates of some of the states economic nexus thresholds. It is sometimes easy to forget that some states have effective dates that will soon be 15 months old, especially when we have so many big states like Texas and California implementing economic nexus on 10/1/2019.

What’s the big deal about getting old?

The U.S. Supreme Court overturned the two cases that required physical presence to create nexus. When the Supreme Court overturns a case, it’s like the case never happened. In theory, this means that the states could go back to 1967, pursuing companies for economic nexus. This made the Supreme Court nervous, which is why South Dakota was smart when they said they would only pursue sellers going forward. The other states agreed amongst themselves to only go forward also, and they have been policing each other because they don’t want Congress stepping in. 

However, the states did not agree to pursue sellers only going forward forever. The states agreed to only go forward from the effective dates. The problem is some of these dates are getting old and the states are starting to act.

Some states are challenging registration start dates and requiring back returns 

The states are reacting to aging effective dates in two ways. The first way states are reacting is by questioning the dates companies use when they register. Some companies when they realize they have this new economic nexus, try to register going forward. By registering going forward, the company tries to avoid back taxes, penalty, and interest. However, some states like South Carolina, South Dakota, and Wisconsin are challenging the start date during the registration process. South Dakota is the most aggressive in forcing companies to use the state’s effective date as the start date and requiring back returns to be filed from 11/1/2018. When a state makes you file back returns, the back tax, penalty, and interest are paid out of your pocket rather than the customers’. Other states, like Maine, are going back through their registration records and determining which companies most likely had nexus prior to the start date they listed on their registration application. The effective date in Maine is 7/1/2018, and sellers are being required to file the back returns.

Other states are beginning to hunt for unregistered sellers

The second way that states are responding to aging economic nexus effective dates is by tracking down unregistered sellers. Some states, like Utah, have purchased lists of companies they believe have crossed the economic thresholds which became effective on 1/1/2019 We know of quite a few companies that have been contacted by Utah. One of our clients asked us to call Utah back for them and the state representative told us this was a new program, and they will be calling everyone on the list. They said they are looking for sellers who are not registered asking them to pay back tax, penalty, and interest. Other states like Alabama, Arizona, and Kentucky are sending letters reminding companies they may have an obligation to register. These are the “nice guy” friendly reminders. However, we do not believe they will stay friendly for long. 

The states are beefing up their discovery and enforcement units

We believe the aforementioned states and activities are just the tip of the iceberg. States have been looking for ways to tax remote sales since before there was even an internet. After 51 years of trying, they now can pursue remote sellers, and the states are gearing up to do so. My personal beliefs are that the next 24 months or so will be extremely tough on many companies as the states flex their muscles and make examples of companies. There are still entirely too many companies that are not taking economic nexus seriously. The states want to change that. 

The biggest danger to companies is what else the states will find

The states are coming, and while they are looking for economic nexus, they will stumble across all types of nexus. One of the most often overlooked causes of nexus is the use of independent or subcontractors. The reason this is the biggest danger is that states routinely go after companies for 7 to 10 years of back tax, penalty, and interest. Penalty and interest can approach or even exceed the amount of back tax owed when talking about exposure going back that far. So while the economic thresholds are getting old, there are far worse things to worry about.

Summary

Not knowing where you have a requirement to collect and remit sales tax can be devastating to a business. Once a state finds a company, the options to mitigate exposure are very limited. Being proactive provides a number of different options. Hopefully, you don’t have any previously unknown physical presence, and hopefully, you act soon to make sure you don’t create too much exposure with this new, but getting old, economic nexus. The best way to start is by figuring out where you have nexus. If you need help, we have free charts for economic nexus. You can find them here. If you need more help, we have additional services that range from an economic nexus determination consultation for $495 all the way up to a full-blown nexus review, which can include not only sales tax but income tax. Whatever you decide, remember that you have multiple options when you are proactive. 

By: Michael J. Fleming, CMI

This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.