In its 2018 South Dakota v. Wayfair decision, the U.S. Supreme Court removed the physical presence roadblock that previously prevented the collection of state sales and use tax from online vendors. Since then, states have been acting quickly to impose the new economic nexus standard and minimum sales threshold.
Jurisdictions are also taking this economic nexus created for sales and use tax and applying it to other state and local taxes. As such, it is critical to consider the full range of state and local taxes when assessing Wayfair impact and reviewing the impact of sales thresholds.
Here are some recent examples of state activity regarding economic nexus for non-sales and use taxes:
The Texas Comptroller of Public Accounts recently updated its reporting standard regarding the economic nexus standard for the state’s franchise (i.e. gross margin) tax. Under the new standard, economic nexus is established when a foreign entity, which does not have a physical presence in Texas, has gross receipts of $500,000 in the state during its federal income tax accounting period. This franchise tax economic nexus threshold is identical to the sales tax economic nexus threshold recently effective on October 1, 2019, but the franchise tax standard goes into effect for tax reports due after January 1, 2020. Any taxpayer that is registering for sales and use tax based on meeting the $500,000 threshold should also plan on filing and paying the Texas Franchise Tax return by May 15, 2020.
Beginning January 1, 2020, the nexus threshold for all Washington Business and Occupation (B&O) tax classifications and sales tax collection will be $100,000 of combined gross receipts per calendar year for businesses without a physical presence in the state. The prior sales threshold for B&O was $285,000 of sales in 2018 and 2019. Physical presence will continue to establish nexus for all B&O tax classifications and sales tax collection, as was always the case.
The Ohio Commercial Activity Tax has economic nexus based on combined gross receipts of $500,000.
Oregon enacted a Corporate Activity Tax (CAT) effective January 1, 2020 (also referred to as a gross receipts tax). The tax is imposed for businesses with $1 million or more in Oregon sales at a rate of 0.57%, plus a flat tax of $250 on the taxpayers’ first million of taxable commercial activity. Taxpayers whose taxable commercial activity does not exceed $1 million are exempt from the Oregon CAT.
Some other jurisdictions applying economic nexus for various taxes include Hawaii’s Income Tax and local taxes in Portland, Oregon, and San Francisco, California.
At a local level, the economic nexus standard is $100,000 of sales in Philadelphia to trigger the city’s gross receipts portion of the Business Income and Receipts tax. Statewide, Pennsylvania has an economic nexus standard of at least $500,000 of sales in the Commonwealth for the purposes of Corporate Net Income taxes.
Under the Interstate Income Act of 1959, also known as Public Law 86-272, a state cannot impose an income tax on a business whose sole activity within that state is the solicitation of sales of tangible personal property. Taxpayers who meet the $500,000 threshold and take this Public Law 86-272 position are not required to remit Corporate Net Income tax to Pennsylvania, but information must still be reporting to the Pennsylvania Department of Revenue.
RKL’s State and Local Tax team continues to monitor the implementation and interpretation of the Wayfair decision throughout the country. Contact me with any questions using the form below.