Economic Nexus and How It Might Affect You – Revised
On June 21, 2018, the US Supreme Court issued a decision in South Dakota v. Wayfair overturning the physical presence requirement commonly applied to determine sales tax nexus and opening the door for economic nexus.
What that means is the federal government will allow each state to determine whether a remote seller with no physical presence in the state, is obligated to collect and remit that state’s sales tax on sales into the state. With the court’s anticipated decision, many states have passed economic nexus laws in which there is often a minimum sales threshold that must be met by a remote seller to create sales tax nexus.
As of September 15, 2018, there are 31 states (including Minnesota) which have passed laws/rules allowing for an economic nexus standard and/or use tax notice and reporting requirements. In the states enacting notice and reporting requirements, remote sellers who are not currently collecting and remitting the state’s sales tax must notify the purchaser that there may be use tax due on their purchase. The state will also require a detailed list of purchasers to be submitted on all sales made into the state during the year. For a listing of states that have established an economic nexus standard or have implemented notice and reporting requirements, please see the link at the bottom of this article.
The Minnesota Department of Revenue has recently announced they will apply economic nexus policy to local sales and use taxes without a sales threshold. Starting October 1, 2018, for monthly and quarterly Minnesota sales tax filers and beginning January 1, 2019, for annual Minnesota sales tax filers, sellers will be required to collect and remit all Minnesota local taxes based on the location where the customer receives the product, regardless of whether the seller has a physical presence in that jurisdiction.
For example, before October 1, 2018, a Wright County business making a retail sale in Minnesota was only required to collect and remit the applicable Minnesota sales tax on all sales to Minnesota customers, but was only required to collect the local taxes where the seller had a physical presence. This was true whether the product was purchased at the business’ physical location or shipped via common carrier to the customer. Under the new law, the seller must collect and remit local tax based on where the customer takes possession of the product. For instance, if a Wright County business making a retail sale ships the product to a customer located in Hennepin County, they would now be required to collect and remit Minnesota sales tax, Hennepin County Tax, as well as the Hennepin County Transit Tax.
Using the same facts from the above example, the purchaser who picks up the product from the business’ physical location in Wright County but then brings it back for use in Hennepin County, is now liable for the local use tax rates for Hennepin County. Minnesota will, however, allow any sales tax paid at the time of purchase to offset those use tax obligations. A link to Minnesota’s local sales tax rate calculator can be found at the bottom of this article.
It should be noted that sales tax laws are constantly changing and for the most up to date information, you should contact your tax advisor. Going forward, sellers will need to consider both physical presence and economic nexus standards when determining whether they must register and collect sales tax. While a business might not meet the economic nexus standard for sales tax nexus in a State, they could still have sales tax nexus via physical presence standard.
If you have any questions on how economic nexus laws may affect your business, please contact our office at (952)476-7100.
Economic Nexus Summary as of 7.10.19