Other States may set their own threshold for economic linkage, but it must be demonstrated that it does not unduly impede or burden inter-State trade. South Dakota v. Wayfair determined what would be considered constitutional by the federal courts. As a result, a majority of states have set income at $100,000 or 200 separate transactions as the threshold. These definitions, which focus on a commercial presence in a State, are only starting points for determining the link. What`s still unclear is whether states can retroactively apply the economic nexus provisions to levy sales tax and income tax from out-of-state sellers for activities that took place prior to the Wayfair decision in 2018. Income tax rules on economic presence have been in place for much longer than their VAT counterparts and, as such, taxpayers have actively challenged these income tax rules. The results of these cases show once again the inequality that exists today in the world of VAT. In Tax Commissioner v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.Va. 2006), the West Virginia Supreme Court of Appeals authorized tax enforcement against MBNA, which had no tangible connection to the state.
The Decision partially recognises that income taxes do not appear to impose the same level of compliance burdens as VAT. In addition, the Court stated: “Instead of establishing a standard for physical presence, the Court considers that a significant criterion of economic presence is a better indicator of the existence of a material link for the purposes of the commercial clause” (emphasis added). This is the court`s response to the taxpayer`s argument in favour of using the presence standard for corporate income tax. The Court emphasises the requirement of a `significant` criterion of economic presence. 200 transactions do not necessarily reach the “significant” level of economic presence, especially when it comes to sellers of relatively inexpensive items. Chartered accountants can also audit companies that advertise heavily in their state or have reached a certain level of public awareness. States will also continue to look for sellers who may have facilities installed in their state to make sales or stock inventory. An in-state facility or inventory represents an old-school physical presence and can serve as the basis for an audit that goes back well before economic nexus standards emerged.
This has led to many conflicts in how states interpret the law. Thanks to their different interpretations of the law, a state can adopt stricter regulations than other states. This makes it all the more difficult for a multi-state company to manage compliance in the different jurisdictions where it is considered a link. Current laws in California may be unconstitutional. However, there are currently no legal challenges or judicial restrictions. In addition, there are no legal restrictions on California`s fiscal capacity under the concept of economic connection. At least for now, California law, as it applies to the state`s economic context, is the supreme law of the land. The VAT link defines the degree of connection between a tax jurisdiction such as a state and an entity such as your company. For example, if you use Amazon or do any other Nexus creation activity, you are effectively setting up branches in multiple states. Amazon currently has warehouses in 33 states. So if you use the Amazon FBA platform to sell goods through Amazon, you`re linking in 33 different states. In such a case, regardless of the size of the company, the scope of the company can cause a major compliance issue in many states.
If you are deemed to have a connection within a state, even if you are outside that state, the connection is equivalent to having a branch in that state. After Complete Auto, the Supreme Court ruled on Quill v. North Dakota in the early 1990s. In Quill, the Court held that there is an economic link with a State only if there is a physical presence in that State. Quill established this clear line rule, which limits states` tax possibilities. The economic context was a central issue in South Dakota v. Wayfair before the U.S. Supreme Court.
21. In June 2018, the United States Supreme Court ruled in favour of South Dakota, striking down the traditional physical presence rule as a necessary condition for imposing VAT and collection requirements on a remote retailer. This was the first Supreme Court decision on the link since 1992. States now have the right to require the collection of taxes from online merchants and other long-distance merchants without a physical presence in their state if they meet certain economic thresholds. In the absence of legislative or judicial comments on the matter, states can effectively charge taxes retroactively for activities that constitute an economic context. In fact, a number of States have already seized this opportunity to intensify their law enforcement efforts. California is obviously at the forefront of this effort. From a sales tax perspective, the economic context, in simple terms, requires sellers to collect sales tax in states where the seller`s sales exceed the state`s monetary or transactional threshold. Enhanced enforcement based on an economic link – rather than a physical link – is therefore a direct consequence of the Court`s Wayfair judgment. The case is a victory for states because the expanded definition of the link has offered states another way to increase tax revenues.
Most states have adopted the legislative position that an organization has an economic connection if: Much of this data can be gleaned from corporate-level tax returns filed by the state taxpayer, which allow for a breakdown of ownership, payroll, and turnover. As explained above, RODs can use information in property tax records to determine whether a business owns real estate in the state in order to establish a link. Another resource status that DORs use is the purchase records of their state taxpayers obtained through consumer tax audits. Do the records show significant out-of-state suppliers that do not currently collect taxes? Aggregating this type of data from many audits could generate an important list of objectives. In South Dakota v. Wayfair, the Court removed the physical presence rule in the commercial clause as a standard for creating a link in a jurisdiction. However, physical presence will always create a bond and is the first consideration when determining the connection. In the run-up to the court`s decision, many states have enacted new types of economic laws to govern how sellers do business today. This link can be created through direct selling or through more intangible means such as SaaS. It is better to play it safe than to be surprised by a VAT control.
The publication of FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Clients (Topic 606), means that “all entities with federal, state, and sales tax compliance responsibilities should consider potential tax planning and reporting issues” (“U.S. Tax and FASB`s New Paradigm for Revenue Recognition,” JofA, June 2017). To the extent that a legally obliged undertaking does not collect VAT from its customer, the tax due becomes a debt of the taxable person. As a result, most companies have their books and records audited by independent third-party audit firms to assess and certify tax liability at the federal and federal levels, and a standardized measure of the relationship between state and local tax jurisdictions would make it easier for auditors. The Wayfair case, among other things, involved a state law that states that economic activities that generate more than $100,000 are an important link that creates activities. In this case, the state law had a clear dollar threshold that had to be met in order for the state to determine that there was an economic connection. The new VAT link standards create a greater compliance presence for U.S. businesses and potentially foreign businesses selling to the U.S. With the shift from physical presence to economic link, states have become more aggressive when it comes to identifying and requiring businesses to comply with sales tax collection and filing rules.
The economic nexus of VAT is here to stay, and this article explores what this means for businesses and identifies potential legal arguments in this new area of tax competence. In the three years since the Wayfair Supreme Court upheld the South Dakota Economic Context Act and struck down the court`s physical presence precedents, states have struggled to enforce this new link standard for remote Internet vendors. because traditional audit approaches use information to identify sellers with a physical identity or connection within the state. (see also “Sales Tax Compliance Post-Wayfair”, JofA, August 2019). For example, if employees work in the state, if the company is required to file payroll taxes, or, if the company owns real estate, RODs can obtain real estate and tax records to validate sales tax compliance or identify potential audit targets. However, the economic context offers fewer opportunities for states to prove that a company should collect sales tax, compared to traditional physical presence standards, where data is more readily available. There are countless details, deadlines, whims and state idiosyncrasies. The fact is that if you knowingly or unknowingly created a bond in a state, you are subject to very strict obligations.