2020 sales tax changes midyear update: Wayfair edition

It’s been just over two years since the Supreme Court of the United States issued its groundbreaking decision in South Dakota v. Wayfair, Inc. (June 21, 2018). Our 2020 sales tax changes midyear update delves into what that means for businesses.

The decision overruled the physical presence rule, enabling states to tax sales by businesses with no physical presence in the state (remote sellers). States now have the authority to base a sales tax collection obligation solely on economic activity, or economic nexus, and 43 states and the District of Columbia do.

Florida and Missouri are the only two states with a general sales tax that don’t have an economic nexus law, and economic nexus legislation has been introduced in both. The bills failed for different reasons. In Florida, economic nexus is often branded as a new tax, and there’s not much support in Florida for new taxes. In Missouri, the complex local sales and use tax system would need to be simplified before the state could require remote sellers to collect, and that’s a big ask.

Both states will likely adopt economic nexus eventually. The ecommerce boom created by the coronavirus (COVID-19) could be the catalyst: Florida and Missouri may find they need to collect tax revenue from remote sales to balance their budgets.

While the two stragglers work it out, some states are streamlining their economic nexus laws to better fit their needs. The first to adopt economic nexus in the wake of the Wayfair decision tended to model it on South Dakota’s law, which provided an exception for businesses with less than $100,000 in sales or 200 transactions in the state in the current or previous years. But sales tax is rarely one size fits all.

Some of the bigger states, like California and Texas, eliminated the transaction threshold and raised the sales threshold to $500,000. Several other states kept the $100,000 sales threshold but eliminated the transactions threshold, and more could follow suit. States are continuing to update their guidance on which sales count toward the thresholds. In some, it’s only taxable sales of tangible personal property; in others, it includes taxable and exempt sales of tangible personal property, intangible property, and services.

The fact that every state has a unique threshold creates compliance challenges for companies with customers in multiple states. Keeping track of how long nexus lasts after it’s been established (trailing nexus) poses another challenge: Some states have clearly stated trailing nexus policies, but many don’t. That may change now that most states require out-of-state businesses to collect and remit sales tax.

When the Wayfair decision was announced, many tax experts speculated it would bleed into other taxes. They were right.

Texas now has an economic nexus standard for franchise tax, Hawaii for income tax. Several cities, including Portland, Oregon, and San Francisco, California, are applying economic nexus to local taxes. The more state and local governments are strapped for cash, as they are because of COVID-19, the more likely they are to look for new sources of tax revenue. Economic nexus is an obvious choice.

But it isn’t the only one. The newly remote workforce could create a variety of new tax obligations for both employers and employees. Initially, many states waived enforcement of certain nexus laws because of the pandemic. However, some now say they’ll soon start enforcing them: A temporary reprieve in Massachusetts will end the earlier of December 31, 2020, or 90 days after the state of emergency in Massachusetts is lifted.

Read more about what to expect in the months ahead in our 2020 sales tax changes midyear update, or check out the 2020 sales tax changes midyear update webinar.