The California Franchise Tax Board (FTB) recently announced the 2018 indexed threshold values for determining whether an entity is doing business in the state. If any of the following conditions are met, the taxpayer is considered to be doing business in California:
On September 13, 2018, a bill was introduced in the U.S. House of Representatives "to prohibit States from retroactively imposing a sales tax collection duty on a remote seller," among other purposes. H.R. 6824, also called the Online Sales Simplicity and Small Business Relief Act of 2018, seeks to limit the impact of the recent Wayfair decision, which eliminated the need for a business to be physically present in a state in order to have economic nexus in that state.
Back in June, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc. that reversed Quill's requirement for physical presence to establish sales tax nexus for out-of-state businesses. Individual states are now hurrying to decide upon economic or transactional thresholds to govern who should be collecting and paying over sales tax concerning primarily e-commerce sales.
In a 5-4 decision, the Supreme Court ruled today that states may now require online retailers to collect sales taxes from consumers, regardless of where the business is located or the product is delivered. In 1992, the same court ruled that a business had to have some kind of "physical presence" or "nexus" in order to be required to collect sales tax in a state. With the increased use of online shopping, however, it turns out not all taxpayers report non-taxed purchases to the states in which they reside. In fact, an estimated $33.9 billion goes uncollected in sales taxes each year, costing states a significant sum. Additionally, internet shopping tax-free has hurt the brick-and-mortar stores that already have higher operational costs due to a physical presence in a state, since they must collect sales tax on taxable transactions.
South Dakota is taking the physical presence rule back to our nation's highest court in its dispute with Wayfair, Inc., to determine whether it may continue to require out-of-state sellers such as online retailers to register with the state and collect and pay over sales tax. In the seminal case from 1992, Quill Corp. v. North Dakota, the U.S. Supreme Court ruled that retailers did not have to collect sales tax in any state where they have no physical presence. However, the exponential growth of eCommerce and internet sales has significantly changed the retail landscape since that time.
If Congressman Jim Sensenbrenner (R-WI) and House Judiciary Chairman Bob Goolatte (R-VA) get their way, it will. On June 12, 2016, Sensenbrenner and Goolatte introduced the "No Regulation Without Representation Act of 2017" which would expand the "physical presence" requirement of a similar 2016 House Bill (H.R. 5893) to all taxes and to all regulations in general.
California Rev. and Tax Code section 23101 defines what it means to do business in California, including a sales threshold for taxpayers not physically located in the state. A taxpayer is considered to be doing business in California "if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit" where any one of a number of conditions are satisfied, including having $54,771 in real and tangible personal property (originally $50,000), $54,771 in payroll (originally $50,000), and $547,711 in sales (originally $500,000) in the state for taxable year 2016.
Not surprisingly, a recent declaratory action has challenged South Dakota's bold move to require many out-of-state sellers to register with the state and begin collecting sales tax (previously discussed here). American Catalog Mailers Associations and NetChoice v. Gerlach questions the constitutionality of the economic nexus legislation based upon the physical presence rule from Quill Corp. v. North Dakota.
Recently, Forbes magazine named South Dakota as one of the top 10 states for business, particularly since it ranked number one in the cost of doing business. A new state law will likely keep South Dakota in first place for in-state business statistics, to the detriment of out-of-state sellers. Last month, South Dakota Governor Dennis Daugaard signed into law a bill that requires many out-of-state sellers to register with the state and begin collecting sales tax. All sellers conducting more than 200 transactions with South Dakota purchasers, or making more than $100,000 in gross sales to South Dakota, must register with the state.
California and the other 49 states could soon collect millions of dollars from online sales taxes. Last week, Reuters News reported that U.S. House and Senate introduced the Marketplace Fairness Act of 2013 (The Bill). This is Indeed, a remarkable turn of events, given the often toxic relations between the House and Senate. Lawmakers finally appear to be in agreement that the time has come for the States to be permitted to collect sales and use taxes from remote sellers, and have recently assured state lawmakers they would pass a law in 2013.