Sales Tax Nexus
Nexus refers to the connection a business has to a state. Once a business has nexus, they are required to collect and remit sales and use taxes to the state and its local taxing jurisdictions. Before South Dakota v. Wayfair, physical presence was required for a business to have nexus.
States started enacting innovative nexus laws beginning in 2008, which began with New York passing the first state affiliate nexus law. Affiliate nexus refers to when a remote vendor has a connection to an in-state entity that performs certain work, such as maintaining a warehouse in the state or anything in relation to a remote vendor’s sales. The connection between the in-state entity and the remote vendor’s work would result in the affiliate having nexus within the state.
Click-through nexus laws require remote sellers to collect taxes if they have a linkage with any in-state marketing affiliates, specifically through click-through referrals such as links or ads. The seller generally pays the in-state entity for any sales as a result of these ads or links. This connection establishes nexus since the in-state entity refers individuals to the remote seller’s website.
The first economic nexus law was enacted by South Dakota in S.B. 106 in 2016. Economic nexus refers to when a business has a certain amount of economic activity, such as the amount of transactions or sales, that require them to collect and remit applicable sales and use taxes. For example, a remote seller has economic nexus in South Dakota if: 1) gross revenue from sales into the state exceeds $100,000; or 2) has 200 or more separate transactions.
Marketplace Collection Requirements
Marketplace provisions aim to transfer collection responsibilities from third-party sellers to marketplace facilitators. Marketplace facilitators refer to a marketplace that contracts with third-party sellers to sell goods and services through the marketplace’s platform. For example, this requires websites such as Amazon and eBay to collect and remit taxes on behalf of their third-party sellers to the state.
States began enacting these laws in 2017. As of January 1, 38 states and the District of Columbia have marketplace facilitator collection provisions, which will trigger these online platforms to collect and remit taxes for their third-party sellers. The NCSL Executive Committee has unanimously adopted guidelines for model legislation to implement marketplace facilitator sales tax collection requirements.
Estimates were wide-ranging on how much revenue was unable to be collected prior to South Dakota v. Wayfair, but there is no doubt it was a significant amount. Similarly, state revenue estimates are just as varied. NCSL’s State Tax Actions report gathers information through surveys to legislative fiscal offices on tax and revenue changes enacted each calendar year. In the 2018 report, states that enacted tax changes requiring collection on remote sales had estimates ranging from about $7 million to $190 million for fiscal year 2019.
States that are SSUTA members have centralized, state-level sales tax collections, which reduces administration and compliance costs. As noted earlier, the U.S. Supreme Court implied that this is one of the reasons South Dakota’s economic nexus legislation was upheld. However, localities rely on sales tax revenue in 38 states. Many of them levy different rates than their home state and some have, up until the Wayfair decision, been responsible for collecting these taxes. If these localities want to gain access to the online sales tax revenue pie in a way that is consistent with the Wayfair ruling, they might need to cede some autonomy to the state and allow it to collect the tax on their behalf.
The state passed the “Simplified Seller Use Tax Remittance Act” in 2017, which allows eligible remote sellers to collect and remit a flat, eight percent sales tax rate, rather than collecting and remitting based on a litany of different local rates. The local revenue share is four percent (two percent to counties, two percent to cities) and is distributed based on population.
Colorado is a “home rule” state where localities levy and collect their own sales taxes (which often have bases that differ significantly from the state’s). Before the state legislature had a chance to respond to the Wayfair decision by taking steps toward simplifying this system, the DOR released new sales tax rules that suggested that sellers may be required to collect sales tax in the 71 jurisdictions that collect their own taxes, but subsequently adopted a grace period through May 31, 2019. To promote local sales tax uniformity and simplify administration, Colorado’s Sales and Use Tax Simplification Task Force has recently recommended legislation that would require the DOR to procure an electronic sales and uses tax simplification system.
A proposal pending in Illinois (H 270) would grant localities the authority to require remote retailers to collect and remit sales taxes. (The state is currently only collecting the 6.25 percent state rate.)
Louisiana is another home rule state with a bevy of local jurisdictions that have been responsible for levying and collecting their own sales taxes. To simplify this system, the legislature created the Sales and Use Tax Commission for Remote Sellers, which will serve as the single, state-level tax administrator for remote sales. It is not yet requiring remote sellers to collect and remit sales taxes, as it is still developing procedures and local tax uniformity efforts to administer sales and use tax collection for remote sellers. The state will collect an 8.45 percent rate from out-of-state online vendors. The collection includes the state sales tax rate of 4.45 percent and a 4 percent rate that will be distributed to local governments based on population.
Similar to the measure enacted in Alabama, a bill (SB 50) moving through the Missouri Senate would create a "Simplified Remote Sales Tax Remittance Program" that would allow eligible remote sellers to collect and remit a simplified remote sales tax rate of 6.5 percent. (3.5 percent for food sold or delivered into the state.) The proceeds will be distributed to the localities in a manner determined by the Department of Revenue, but such determination has not yet been made.
Since the Wayfair decision, there have been several proposals at the federal level to either turn back the clock and reimplement physical presence nexus requirement or otherwise pre-empt existing state laws. NCSL strongly opposes any federal effort that would limit or delay the ability of states to collect sales taxes from remote sellers.
US H 6724 (2018): This measure would have prohibited states from retroactively collecting remote sales taxes, required centralized collection, and forced states to establish a single, uniform sales tax rate for online sales.
US H.R. 6824 (2018): Representative Jim Sensenbrenner (WI) introduced a measure in September 2018 that would have prohibited states from retroactively imposing sales tax collection duties on remote sellers, classified exempt small sellers as those with gross annual receipts of $10 million or less, and required states to join an interstate compact with simplified, uniform compliance processes before they could levy a tax on remote sellers. It did not pass out of committee.
US H.R. 7184 (2018): Rep. Sensenbrenner also introduced the “No Retroactive Online Taxation Act of 2018” in November 2018, which would have prohibited states from retroactively imposing sales tax collection obligations on remote sellers for any sale that occurred before June 21, 2018. It did not pass out of committee.
US SB 3725 (2018): The Online Sales Simplicity and Small Business Relief Act of 2018, which failed to pass, would have delayed the states’ ability to impose a sales tax collection obligation on remote sellers before 2020, prohibited retroactive taxation, and exempted sellers with gross receipts of $10 million or less from collection requirements.
US H.R. 379 (2019): This measure would prohibit localities from imposing collection responsibilities on remote sellers and would place conditions on states before they could do so as well. Specifically, states would need to establish a uniform sales tax rate and centralized collections and could not require sellers to provide information on purchasers beyond ZIP codes and the amount of taxes collected from ZIP codes. It would also delay the ability of states to impose sales tax collection obligations on remote sellers until Jan. 1, 2020.
US S 128 (2019): The Stop Taxing Our Potential Act is a recently reintroduced version of a failed measure in 2018 (SB 3180) which would undo the Wayfair decision by re-establishing a physical presence nexus requirement for state sales tax collection responsibilities. It goes on to define what does and does not constitute “physical presence.”
NCSL Federal Correspondence Post South Dakota v. Wayfair