On June 21, 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc., striking down the physical presence requirement for the relationship between sales tax and use tax. The legislation at issue in the case required out-of-state retailers who did not have a physical presence in South Dakota to collect and remit state sales tax if the retailer shipped $100,000 in sales or 200 transactions to South Dakota in the previous year. Two clauses of the United States Constitution form the origin of a fiscal link: everything related to a relationship has to do with “presence”, but this presence can be defined differently for different types of taxes and even in the context of VAT. This historically means that a company is physically located in that state in some form, such as: owning and maintaining real estate there or employing workers in the jurisdiction. 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. Many states are now adopting regulations similar to those in South Dakota, imposing a link on non-resident companies that meet a certain economic threshold. This can result in businesses from a much larger number of states having a nexus than before, especially for businesses that make online sales of taxable tangible personal assets or services.

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. 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.

In the wake of Wayfair, linkage activities have also continued to increase in income taxes. 4. In August 2021, the Multistate Tax Commission (“MTC”) unanimously adopted a revised version of the “Statement of Information Regarding the Practices of the Multistate and Supporting State Tax Commission under Public Law 86-272.” The Multistate Tax Commission is an interstate tax agency that works on behalf of states and taxpayers to facilitate the fair and efficient administration of state tax laws that apply to multinational and multinational corporations. Many countries incorporate the Commission`s point of view into their tax legislation. Similarly, the commercial clause governing the taxation of inter-State trade requires the existence of a “substantial link” between the taxed activity and the State of taxation. The trade clause has also been interpreted as prohibiting States from imposing an excessive burden on inter-State trade. A key difference between the requirements of the due process clause and the requirements of the commercial clause link is that the requirements of the commercial clause link can be changed by Congress. If your business meets the requirements of a multi-state tax relationship, you must collect, report, and pay applicable sales taxes on goods and services in each state, as well as pay state income tax on all income earned in that state.

The concept of link has become a complicated topic with the advent of online sales companies serving many states and countries. Learn more about what this means for you. State pressure to create a link dates back to the June 21, 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. Decision 5-4 ruled in favor of South Dakota and its economic nexus provisions for sales tax collection. The law, upheld by the court, requires remote customers with annual national sales of more than $100,000 or 200 separate transactions to collect and remit sales tax. SELF-PACED CPE: Learn about the different ways states define and enforce the link, and how to determine when your business or client has a connection in a state, requiring filing tax returns. There is no specific common definition of the relationship between the 50 States. In addition, definitions and rules for determining the link are constantly changing, and most States are careful to give themselves flexibility in their definitions. This means that when determining the link with VAT, a company must look at each state individually and remain constantly up to date with a number of changing regulations and interpretations.

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. As many taxpayers register with states for the first time, we expect an increase in nexus questionnaires sent out by state tax authorities. The questionnaires can be used to determine if the taxpayer has a link for additional taxes in the state or if the taxpayer had a sales tax link prior to the Wayfair decision. This would require you to set a sales tax rate for that location and collect it from every resident of that place who buys products from you. You will likely also have to pay income tax to this state. The term “nexus” is used in tax law to describe a situation where a company has a tax presence in a particular state. A link is essentially a link between the tax administration and a company that has to collect or pay the tax. Twenty-eight states use both dollar-based and transaction-based threshold link standards.

Another 15 states have adopted only one sales dollar threshold standard. In a controversial situation where the governor of Kansas runs against the attorney general, Kansas is currently setting an economic nexus standard without any threshold. Of the states or territories with state and/or local sales taxes, all except Missouri have passed economic relations laws. Florida`s new economic connection legislation will go into effect on July 1, 2021. The Pennsylvania Department of Revenue outlined its economic context rules in a Sales and Use Tax Bulletin (see Pennsylvania Sales and Use Tax Bulletin 2019-01). In general, audit firms place a higher priority on federal and state income taxes than sales taxes. In a post-Wayfair world, this needs to change, and taxpayers need to be aware that a potential significant liability is related to sales tax, as states are now applying an economic nexus measure. It should be reviewed quarterly, like income tax. In addition, businesses should set aside any sales tax obligations in the states where they operate. Distance sellers should also take into account contingent liabilities that need to be recognised in relation to potential liabilities due to exceeding the link thresholds. Much of this data can be gleaned from business-level tax returns filed by the state taxpayer, allowing for a breakdown of real estate, payroll, and sales. 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. The economic context was a central issue in South Dakota v. Wayfair before the U.S. Supreme Court. On June 21, 2018, the U.S. Supreme Court ruled in favor 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. The taxable business must pay and collect sales tax in that state if it is connected to it, and it must pay income tax on income earned in that state.

The revised MTC guidelines focused on the new digital economy and web-based businesses. The guidelines suggest that most businesses with a website should not benefit from public law protection 86-272.