Following the U.S. Supreme Court landmark ruling that said states can hold out-of-state retailers accountable for sales tax collection, many states with similar nexus laws have left open the possibility of forcing online sellers to pay back taxes.
In last month’s 5-to-4 ruling in the South Dakota vs. Wayfair case, the high court ruled that Internet retailers can be required to collect sales taxes in states where they have no physical presence, or nexus.The decision overrules the 1992 Quill Corp. v. North Dakota. That decision stated that catalog retailer Quill did not have to collect sales tax in North Dakota because it had no physical presence in the state.
States See a Windfall
While the Wayfair opinion, written by now-retiring Justice Anthony Kennedy, noted that retroactive tax collection might hurt the states’ ability to maintain the constitutionality of such nexus laws if challenged, that might not stop states from trying.
Still, that could put online sellers on the hook for tens of millions of dollars in retroactive back taxes as states with nexus laws seek aggressive ways to generate much-needed revenue for education, healthcare and infrastructure.
And, according to Justice Kennedy, the physical presence test was estimated to cost the states between $8 billion and $33 billion annually. That potential revenue could be tempting for states.
To that end, Massachusetts has already displayed signs of aggressively pursuing back taxes related to its “cookie nexus” tax regime. This law, which went into effect in October of 2017, requires online vendors to collect state sales tax if they have property interests in or use in-state apps and cookies. Meanwhile, the state has reportedly already begun attempts to collect back taxes from businesses during that period.
Nexus Taxes are Spreading
To date, 22 states have passed nexus laws. Only South Dakota and Maine have enacted sales tax nexus laws that include language exclusively barring the imposition of retroactive back taxes. A New Jersey bill that would set thresholds similar to those in South Dakota also forbids retroactivity, but Gov. Phil Murphy (D) has yet to sign it. Hawaii, Oklahoma, Kentucky, Connecticut and Illinois have nexus laws that will take effect before 2019. Other states are expected to follow suit.
Most importantly, if states opt to use the Wayfair ruling as leverage to force online sellers to pay up retroactively for selling goods within their borders, there could be devastating consequences for many online sellers. Therefore, small online-only businesses and mom-and-pop e-marketers will be the most dramatically impacted. But it’s already expected to be very expensive for small businesses forced to collect taxes for thousands of separate state and local jurisdictions under nexus laws. And imposing retroactive nexus taxes could put those companies out of business.
Meanwhile, many online retailers continue to push for a national online sales tax. They claim that approach would simplify the tax collection process. In addition, a national online sales tax would eliminate the burden and hefty costs associated with one implementing expensive tax collection systems to deal with the more than 10,000 US tax jurisdictions. Because that means continued innovation and competition online from business of all sizes and not just the biggest online players like Amazon and Walmart.
States with Nexus Laws and Thresholds
Most of these nexus laws include specific threshold amounts for sales that a seller must meet to be forced to collect taxes within those states. Here’s the states, the date they enacted nexus laws, and the thresholds:
- Alabama (Jan. 1, 2016), $250,000 in in-state sales
- Connecticut (Dec. 1, 2018), 200 transactions or $250,000 in in-state sales
- Georgia (Jan. 1, 2019), 200 transactions or $250,000 in in-state sales
- Hawaii (July 1, 2018), 200 transactions or $100,000 in in-state sales
- Idaho (July 1, 2018) $10,000 in in-state sales
- Illinois (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales
- Indiana (July 1, 2017), 200 transactions or $100,000 in in-state sales
- Iowa (Jan. 1, 2019), 200 transactions or $100,000 in in-state sales
- Kentucky (July 1, 2018), 200 transactions or $100,000 in in-state sales
- Louisiana (contingent on Wayfair ruling), 200 transactions or $100,000 in in-state sales
- Maine (Oct. 1, 2017), 200 transactions or $100,000 in in-state sales
- Minnesota (contingent on Wayfair ruling), 100 transactions or $100,000 in in-state sales in at least 10 transactions
- Mississippi (Dec. 1, 2017), $250,000 in in-state sales
- North Dakota (contingent on Wayfair ruling), 200 transactions or $100,000 in in-state sales
- Oklahoma (July 1, 2018), $10,000 in in-state sales
- Pennsylvania (March 1, 2018), $10,000 in in-state sales
- Rhode Island (Aug. 17, 2017), 200 transactions or $100,000 in in-state sales
- South Dakota (contingent on state Supreme Court’s approval, following high court‘s Wayfair decision), 200 transactions or $100,000 in in-state sales
- Tennessee (currently on hold due to litigation), $500,000 in in-state sales
- Vermont (contingent on Wayfair ruling , July 1, 2017), 200 transactions or $100,000 in in-state sales
- Washington (July 1, 2017), $10,000 in in-state sales
- Wyoming (July 1, 2017), 200 transactions or $100,000 in in-state sales
Regardless, it’s unclear how aggressively individual states intend to pursue the collection of back taxes related to nexus laws. So, consequently online retailers need to closely watch each state.
Additionally, to learn more about nexus tax laws, you can sign up for the Performance Marketing Association’s Virtual Round Table: Nexus Tax And Wayfair on Tuesday, July 24 at 11:30 am Eastern.