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Sales and Use Tax Nexus Battle – The Final Frontier

May 31, 2016

The nexus “battle” has become more complicated in recent years due to the prevalence of online sales. Is the nexus standard expected to change?

For years now the states have been attempting to widen the net and require more and more businesses to register as a vendor and collect sales tax on their sales. The Holy Grail for the states is to require on-line sellers with no physical presence in the state to become collectors of sales tax. This same battle was fought 25 years ago with regard to mail order sales, with business coming out the victor. But now with internet sales the stakes are many times higher.

The “Amazon Rule”

We’ve written in past blogs about methods the states have tried to expand the nexus standard for sales tax. Check out our blog, “A Guide to Navigating Sales and Use Tax Rules by State” and one of my past pieces, “On Line Retailers Need to Review their Sales Tax Collection Obligations”.

Most of the attention has been paid to the “Amazon rule” or affiliate nexus, where the use of an affiliate marketing program to generate at least $10,000 of sales in a state results in nexus.

Many states are also asserting attributional nexus, where the nexus of one entity can be attributed to other related entities. But always lurking in the background has been the 1992 US Supreme Court decision in Quill which requires a substantial physical presence before a business can be required to collect sales tax in a state.

Physical Presence Doctrine

Last year Supreme Court Justice Anthony Kennedy went on record to say that he was concerned about the continued viability of the Quill physical presence doctrine. This small opening was all the states needed to take their attack on Quill to the next level. As of today both Alabama and South Dakota have adopted sales tax nexus provisions which do not require substantial physical presence and clearly fly in the face of the Quill decision.

New Legislation in Alabama and South Dakota

Alabama adopted through regulation a new standard effective as of January 1, 2016, that requires business to collect sales tax if they have more than $250,000 of receipts from retail sales into Alabama and conduct minimal selling activities, including advertising, in the state.

South Dakota followed suit with a legislative change effective May 1, 2016, which requires businesses with either more than $100,000 of sales in South Dakota or more than 200 separate transactions with residents of South Dakota to collect sales tax. The South Dakota legislation is drafted in such a manner that businesses are not currently required to collect sales tax, but the Department of Revenue is free to bring businesses to court for failure to follow the new law. We understand that the Department has already begun the process of identifying on-line sellers in preparing to send failure to file notices.

Businesses, keep close eye on nexus developments!

The nexus standards adopted by Alabama and South Dakota will certainly result in court challenges, sooner rather than later. Businesses need to keep a close watch on developments in this area as the results may well redefine the sales tax nexus requirements for the internet age. On-line sellers that currently meet the new nexus standards in Alabama or South Dakota also need to evaluate how they will respond.

Questions? Contact any member of our Tax Services Team.

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