Since the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, 138 S.Ct. 2080 (2018), this past summer reversing its long-standing “physical presence” nexus test under Quill Corp. v. North Dakota, 504 U.S. 298 (1992), businesses with contacts in New York have not had guidance on New York’s sales tax requirements going forward.

Pre-Wayfair ambiguity existed as to whether New York could enforce the collection of sales tax purely based on “economic nexus” against non-resident businesses despite a statute it already had on its books for 28 years because that statute arguably violated the U.S. Constitution under Quill.  Post-Wayfair, New York has now issued clear guidance that it will start enforcing this existing statute immediately and, based on its reputation of having the most advanced audit programs in the county, New York means business.

As discussed in our prior article analyzing Wayfair, for 25 years Quill had required physical presence by an out-of-state business for a state to impose an obligation to charge and collect sales tax from residents of that state.  In recent decades, pressure began to mount because of perceived unfairness to brick-and-mortar businesses and the proliferation of the online marketplace depriving states of much-needed revenue.  This culminated in several state campaigns to “Kill Quill.”

To challenge the Quill physical presence test in the Supreme Court, South Dakota and other states intentionally passed an “economic nexus” law requiring out-of-state sellers to collect sales tax if they derive revenue over a certain dollar threshold, or conduct a certain number of transactions in the state, without the requirement of having any physical presence in the state.  In South Dakota’s case, it was more than $100,000 of gross revenue derived from the state or more than 200 transactions conducted in the state in the prior or current calendar year.

While some states like New York passed similar laws before the decision in Wayfair, New Jersey did not pass one until after Wayfair was decided.  In fact, New Jersey was the first state post-Wayfair to pass its own statute on November 1, 2018 that exactly mimicked the requirements of the South Dakota statute.  In total, more than half of the U.S. states have now adopted similar economic nexus statutes.

New York enacted an economic nexus statute back in 1990 in Tax Law § 1101(b)(8)(iv) and regulations under NYCRR 20 §526.10(a)(6), requiring a vendor to remit sales tax if it: (a) conducts more than $300,000 of sales of tangible personal property delivered to New York, and (b) conducts more than 100 sales of tangible personal property in the state during the immediately preceding four sales tax quarters.  However, because the Quill constitutional physical presence test conflicted with this economic nexus law, New York sat quietly waiting to enforce it for the past almost 30 years.

Now post-Wayfair, while states like New Jersey passed new economic nexus legislation, practitioners started wondering what will New York do?  Will it enforce its long-standing but dormant economic nexus law, albeit not completely mirroring the thresholds in the South Dakota law expressly blessed by the Supreme Court?  Alternatively, will it, like other states, pass new legislation identical to South Dakota’s?

This week, on January 15, 2019, New York issued Notice N-19-1 and resolved these questions.  The Notice states, “Due to [Wayfair], certain existing provisions in the New York State Tax Law that define a sales tax vendor immediately became effective.”  As a result, it is anticipated that New York will begin to aggressively audit out-of-state businesses, similar to the wide nets cast by Washington and California to pull in substantial revenue from out-of-state sellers.

Note that the economic nexus thresholds supplement the physical nexus requirement that will continue to apply to New York businesses that fall under those thresholds.

It is not clear whether enforcement will be retroactive back to June 21, 2018 (the date of the Wayfair decision), some other date that New York may determine, or only effective as of the date of Notice N-19-1, or January 15, 2019.  There will also be nuances of calculating the amount of receipts and transactions to determine if an out-of-state business falls below or above the thresholds during the 4-quarter look-back period.  For example, is a monthly subscription to the “Book of the Month Club” by a New York resident one transaction or twelve?  The Notice indicated additional guidance will be forthcoming.

What is clear is that any businesses that did not believe they faced sales tax obligations in New York because they did not have physical nexus cannot operate under that illusion anymore.  If an out-of-state business has exposure, it can take preemptive action and seek a limited look-back period and avoid penalties by participating in New York’s voluntary disclosure program.

If you operate a business and are concerned about past or prospective compliance with laws in New York or other states, you should not hesitate to contact a competent tax professional to seek advice on how to best address these issues.

 

With the continued proliferation of online sales projected to reach $414 billion by the end of 2018, the states, eager to capture their share of this online revenue, have reached for businesses that have no physical contact with the state.

Until the U.S. Supreme Court’s ruling last week in South Dakota v. Wayfair, 2018 WL 3058015 (Sup. Ct. June 21, 2018), physical contact was the traditional hallmark for establishing “nexus.”  Nexus is the link between an out-of-state business and a given state that provides that state with the jurisdiction under the U.S. Constitution to impose sales tax on businesses participating in inter-state commerce.

The Supreme Court finally caught up to the changing market place last week overturning in Wayfair the “physical presence” test established in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  The Court ruled that the physical presence test is “unfair and unjust” to the brick and mortar businesses competing against virtual competitors.  To level the playing field, South Dakota passed an “economic nexus” law requiring out-of-state sellers to collect sales tax if they derive more than $100,000 of gross revenue from the state or conduct more than 200 transactions in the state.  South Dakota prevailed on the constitutional challenge brought by the e-commerce company Wayfair even though the law imposed sales tax without requiring a business to have physical presence in the state.

The Court in Wayfair expressed that the states should be allowed to “seek long-term prosperity” through economic nexus legislation (estimates indicate the physical presence test has cost states billions of dollars in uncollected sales tax).  In fact, many states’ laws had already blurred the once bright-line Quill physical presence rule.  For example, New York passed click-through nexus legislation in 2008, creating a presumption of physical presence for online retailers that had referral agreements with residents of the state as a result forcing online retailers to collect sales tax on New York shipments.  The online retailers Overstock and Amazon challenged this law but it was upheld by New York’s highest court.  In the aftermath of this decision, New Jersey passed its own similar law and also entered into a tax collection and job creation agreement with Amazon.  The online giant conceded having nexus with the state and then, as an apparent concession, built fulfillment distribution centers in New Jersey in conjunction with collecting sales tax on its online sales.

Under this new Supreme Court precedent, New York, New Jersey and other states do not need to prove physical presence by indirect means, but can move forward with implementing legislation to directly impose sales tax on online businesses on receipts generated from the state.

In light of the Supreme Court decision and the liberation of the states from the yoke of the physical presence test, online and other hybrid businesses should not delay conducting “nexus studies” of their business practices, which we regularly conduct for our clients.  This helps companies determine and plan for potential exposure in an audit, including the personal liability exposure for owners and officers for uncollected sales tax that is not dischargeable in bankruptcy.