It’s no secret that the states are continuously working hard to find new and creative ways to generate revenue. You may have heard of one of these revenue generators which has recently become a mainstream consideration for businesses operating across state lines: Economic Nexus.
A Brief History of Economic Nexus
Nexus simply means “connection” to a state.
The concept of economic nexus developed in the state “sales and use tax” provisions of state tax law. However, some states are pushing to expand this concept into the state income tax realm. This area of the law has primarily developed as a result of disputes between states and taxpayers as settled in the U.S. Supreme Court.
For example, in 1992 the Supreme Court in Quill v. North Dakota decided that the Commerce Clause of the U.S. Constitution requires a retailer to have a sufficient “physical connection” with a state before the state could require the retailer to collect sales and use taxes.
With the advent of E-commerce, however, retailers were able to participate in state markets without the former “physical presence” factors considered in the Quill decision. As a result of Quill, many states were unable to tax out-of-state retailers if those retailers were primarily involved in E-commerce activities.
Consequently, states tried various theories to try to expand the “physical presence” test to include E-commerce businesses – but to no avail.
However, the landscape shifted quickly when our own state of South Dakota passed a law intended to challenge Quill. The law stated that taxable nexus with South Dakota could be established with sufficient “economic presence” – that is even without any physical presence. The law specified that a seller had nexus if it made more than $100,000 in sales into South Dakota.
This idea spread to other states and the lion was out of the cage!
South Dakota continued the charge by suing a group of internet retailers in a now famous (or infamous) case known as South Dakota v. Wayfair.
In 2018, the U.S. Supreme Court in its Wayfair ruling upended decades of legal precedent and ruled in favor of South Dakota, resulting in an expansion of nexus-creating activities beyond a physical presence standard.
Consequently, if your business is using E-commerce to sell across state lines, economic nexus must be considered under each state’s unique statute for sales and use tax purposes. As noted above, the states are expanding this theory to also encompass their income tax statutes as well.
We’re here to help if you have further questions on these or any other state nexus sales and use or income tax issues.
Written by: Tom Alvarez, CPA; MBT
