The Impact of Wayfair on New Jersey and Its Neighbors
More than two years have passed since the landmark South Dakota v. Wayfair, Inc. case was decided which dramatically altered the sales tax landscape, not only in New Jersey and its surrounding states, but across the entire country. Prior to Wayfair, the same sales tax landscape had been in place for 26 years, ever since Quill Corp. v. North Dakota established the physical presence requirement for sales tax purposes with its 1992 Supreme Court decision. Under Quill, a business needed to have a storefront or other location in the state, an in-state employee or another form of physical connection to a state, otherwise the business would be exempt from having to collect and remit sales tax to that particular jurisdiction.
Wayfair found the physical presence standard to be unsound and incorrect in the current age of internet services and brought forth the economic nexus standard in determining a business’s sales tax obligation. Economic nexus applies to remote sellers and is determined by either a dollar sales or a transaction volume threshold. Although the exact thresholds vary by state, many states have adopted South Dakota’s model of $100,000 of revenue or 200 separate transactions, which was the standard reviewed in the Wayfair case.
As e-commerce continues to compete with its brick and mortar counterparts, supplementing the physical presence standard with the economic nexus standard for sales tax purposes has allowed states to cast a much wider net on businesses that are economically benefitting from sales within the state. Although Wayfair was decided with regard to sales tax, it is also important to consider the implications that this decision currently has or may have in the future with regard to corporate income tax.
Like many other states, New Jersey adopted the economic nexus model of $100,000 of revenue or 200 separate transactions to determine which remote sellers have a sales tax obligation in the state. The standards were effective as of Nov. 1, 2018, and nexus is determined based on sales during the current or prior calendar year.
New Jersey has not yet adopted a bright-line economic nexus sales threshold for corporate income tax purposes.
New York, on the other hand, implemented its own economic nexus standard. As of June 21, 2018, which was the date that the Wayfair case was decided, a remote seller has a sales tax obligation in New York if it has gross receipts in excess of $500,000 and more than 100 sales that were delivered to New York customers. Rather than using calendar years as the testing period, New York instead requires remote sellers to determine nexus based on the immediately preceding four sales quarters. The sales quarters in New York are for the three-month periods ending May 31, Aug. 31, Nov. 30 and Feb. 28.
Just as New York employs a bright-line economic nexus threshold for sales tax purposes, the state also applies a bright-line standard for corporate income tax. A taxpayer has economic nexus if its New York receipts exceed $1 million during the taxable year.
Connecticut applies an economic nexus threshold for sales tax purposes of $100,000 in gross receipts and 200 or more retail sales into the state, which was effective July 1, 2019. In contrast to its neighboring states, Connecticut requires remote sellers to determine nexus based on the 12-month period ended on Sept. 30 immediately preceding the monthly or quarterly period with respect to which the seller’s tax liability was determined.
An out-of-state corporation will satisfy the bright-line economic nexus standard for corporate income tax purposes if it has $500,000 or more in gross receipts from Connecticut customers during the tax year. However, it is important to note that taxpayers who merely solicit orders of tangible personal property in a state have protection under Public Law 86-272 and are therefore not required to pay corporate income tax in a state where their activities do not extend beyond mere solicitation, regardless of any bright-line nexus standard in place. Protection under Public Law 86-272 applies to all states that impose tax based on net income.
As one of the later states to adopt economic nexus for sales tax purposes for transactions occurring on or after July 1, 2019, Pennsylvania applies only a $100,000 gross receipts threshold, without consideration for the number of sales transactions made to Pennsylvania customers. In contrast to its neighboring states, Pennsylvania requires remote sellers to determine nexus based on the preceding 12-month period, which is a rolling period as compared to a calendar year.
For tax years beginning on or after Jan. 1, 2020, an out-of-state corporation will satisfy the bright-line economic nexus standard for corporate income tax purposes if it has $500,000 or more in gross receipts from Pennsylvania customers during the tax year.
Even though it has been two years since the Wayfair case was decided and states have responded with their respective economic nexus standards, it is not uncommon for taxpayers to either be unaware of their current sales tax obligations or to simply not know how to get into compliance, particularly if they are operating in numerous states or nationwide. There are three options for taxpayers that are seeking to get into compliance for sales tax purposes:
- Registration and prospective filing when the economic nexus standard for a state has been exceeded
- Registration and back filing
- Voluntary disclosure agreements and amnesty programs
There is no one-size-fits-all approach for determining which option should be pursued, and a taxpayer’s potential tax exposure, which includes late filing and late payment penalties and related interest, should be factored into the ultimate decision.
For taxpayers operating in numerous states or nationwide, the time spent on monthly or quarterly sales tax filings certainly adds up. E-commerce companies without dedicated accounting or tax departments may want to consider outsourcing this function to an accounting firm that specializes in sales tax or utilizing automated tax compliance software that integrates with their specific accounting, e-commerce, shopping cart or other applications.
Megan E. Chesley
Meg Chesley, CPA, is a tax Manager at WilkinGuttenplan. She is a member of the NJCPA State Taxation Interest Group.
This article appeared in the July/August 2020 issue of New Jersey CPA magazine. Read the full issue.