This past year, an important US Supreme Court decision called the Wayfair decision was reached. Basically, it said a state (South Dakota, in this case) had the right to determine economic nexus with a company who sold goods to residents within that state. The economic nexus meant the company was required to collect and pay sales tax.
The Wayfair decision set a minimum threshold before the economic nexus kicked in:
- The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000; or
- The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.
After that ruling, many other states started falling in line, requiring other sellers to comply. Some have said that the threshold doesn’t apply and that ALL sales are now subject to sales tax. We’ll wait to see if that stands up because I’m sure that will get challenged at some point.
Now there is an even more concerning challenge. Economic nexus for the two other types of tax: income tax and “other” tax.
Other tax is a gross margin tax like Hawaii has, a B & O tax like Washington has or a franchise tax like Texas has. It’s not income tax and it’s not sales tax. It’s “other.”
Some states are starting to expand economic nexus to include these types of taxes. The US Supreme Court did not include that in the Wayfair decision. So, at this point, we don’t know whether the states would have the right to require that.
Here’s where we are right now:
Hawaii passed an economic nexus threshold of 200 or more transactions and $100,000 in gross income;
Washington reduced the economic nexus threshold for its business and occupation tax to $100,000 in gross income;
Oregon adopted an economic nexus standard for its corporate activity tax with “factor-presence” nexus, which includes $750,000 or more in commercial activity;
Massachusetts has proposed guidance that incorporates features of its Wayfair-inspired law as a basis for capturing corporate income taxes;
Texas is amending its franchise tax regulations, adopting an economic nexus threshold of $500,000 or more in gross sales;
Pennsylvania’s revenue department just published guidance adhering to a $500,000 standard for its corporate income tax; and
Philadelphia has established a $100,000 threshold for its business income and receipts tax.
If this catches on, there could be 41 states requiring business and personal income tax returns. That’s an extra 82 tax returns.
We’ll be watching this for you! Stay tuned for more information by getting on our FREE tax update email mailing list at https://www.ustaxaid.com/free-tax-updates/