Generally companies establish nexus by having a physical presence in the state. However, several states are pushing the boundaries of defining the physical presence in order to generate more revenue. Welcome to the concept of “economic nexus.”
Nexus and Physical Presence
As we discuss in a previous post, “nexus” is the term used to describe the minimum connection that a company (taxpayer) must have with the state in order for the state to be able to subject the company to its state taxing schemes (including sales tax, income tax, gross receipts tax and others). Nexus is normally established by companies having a physical presence in the state, by virtue of having employees, or third party contractors acting on their behalf in a state, or the presence of a warehouse or storefront in the state. Inventory in a state can also create nexus.
Other States take Action
As states try to find new ways of generating revenue, many are taking aim at the nexus physical presence requirement. By not relying on the requirement for physical presence in the state, it will be easier for companies to trip into a state’s economic nexus schemes. What is economic nexus?” It’s basically the concept that a certain amount of sales into a state can create the minimum contact with a state such that a company becomes subject to that state’s rules for collecting and remitting sales tax. It could be $100,000 or $250,000 for instance. And again, economic nexus flies directly in the face of Quill (a US Supreme Court decision which required physical presence before a state could require collection of sales tax).
As a result of the ambiguity of Congress defining nexus and taking a long time to do so, several states are taking matters into their own hands. They are not waiting for Congress to overturn Quill or provide additional guidance in terms of federal legislation. South Dakota passed a law regarding online retailers and sales tax saying that the state is able to collect taxes made from online retailers- even if they don’t have nexus within the state. Last year, we wrote an article regarding this issue.
Alabama has also recently enacted legislation similar to this. Just last month, we wrote an article on this same issue, where they passed a law establishing economic nexus over physical presence. In 2015, they passed a law that requires if a seller has sales of more than $250,000 in the state and engages in certain activities within the state, they have created economic nexus in Alabama.
Indiana’s New Law
Indiana is the latest state to enact economic nexus legislation, similar to the states mentioned above. Indiana governor Eric Holcomb signed H.B. 1129 into law on April 28, 2017. The law takes effect on July 1, 2017. It provides that a retail merchant that does not have a physical presence in Indiana must, as an agent for Indiana, collect and remit the state gross retail tax on retail transactions made in Indiana, “as if the retail merchant has a physical presence in Indiana,” if the retail merchant meets either of the following conditions for the calendar year in which the retail transaction is made or for the calendar year preceding the calendar year in which the retail transaction is made:
- The retail merchant’s gross revenue from any combination of the sale of tangible personal property that is delivered into Indiana, a product transferred electronically into the state, or a service delivered in Indiana exceeds $100,000; or
- The retail merchant sells any combination of tangible personal property that is delivered into Indiana, a product transferred electronically into Indiana, or a service delivered in Indiana, in 200 or more separate transactions.
Indiana has now become the latest state to pass unconstitutional legislation to redefine nexus and generate more revenue for the state. Stay tuned to see which state will be next.
What’s next for states?
Stay tuned for other states to continue to push these limits.
If your company will be doing business in Indiana, or any other state, and needs help navigating their complex tax laws, give Miles Consulting Group a call. We are here to help with all of your multistate tax needs.