Wayfair and Nexus: The Aftermath – Part 3

Indiana issued much-needed guidance to address which sales are used to calculate the economic nexus revenue threshold (other states need to as well), and the City of Philadelphia has joined the party with an economic nexus rule for its local income tax.

By Jess Johannesen, SALT Manager

In previous editions of our SALT Newsletter, we wrote about the flurry of state activity leading up to and immediately following the U.S. Supreme Court decision in South Dakota v. Wayfair as states continued to publish more substantive guidance.[1]  Since the Wayfair decision in June 2018, there are now about 30 states currently enforcing a version of the sales tax economic nexus rule.  Additionally, all of the other states have either proposed or enacted sales tax economic nexus rules to be enforced later in 2019 or 2020.  Thus, every state that imposes sales tax has now enacted or proposed sales tax economic nexus legislation.

This advisory examines recent guidance in Indiana and Philadelphia that highlight two post-Wayfair issues: (1) which sales count toward the state’s economic nexus threshold and (2) how jurisdictions will incorporate economic nexus provisions into income taxes.

First, we summarize an Indiana ruling that addresses whether exempt sales count towards the state’s economic nexus thresholds (an issue that is unclear under many state’s economic nexus rules).  Second, we explain Philadelphia’s new regulation adopting economic nexus for its Business Income & Receipts Tax.  As states begin enforcement of these new rules, we now see states responding to both substantive and procedural issues resulting from Wayfair.

The Indiana revenue ruling illustrates that an out-of-state company must count its exempt sales when determining if it has nexus under Indiana’s economic nexus rule, and such company must file sales tax returns with Indiana even if such returns reflect that zero sales tax is due.[2] In the ruling, the company is based outside of Indiana and makes baked goods such as brownies and cookies.  The company sells their product from their Arizona facility by accepting orders through the company’s website, through Amazon, and over the phone.

Under Indiana’s sales tax law, the company’s sales are exempt from sales tax as sales of food and food ingredients.[3]  However, Indiana’s sales tax economic nexus rule requires a remote seller to file sales tax returns when sales of “tangible personal property that is delivered into Indiana; a product transferred electronically into Indiana; or a service delivered in Indiana” exceed either $100,000 or 200 separate transactions in the current or preceding calendar year.[4]

Based on the statutory language, the ruling concludes that the thresholds apply regardless of whether “any” of the sales were taxable.  The company must register as a retail merchant, “even if none of the bakery items are subject to Indiana sales or use tax,” once the company’s Indiana transactions or revenues exceed one of the thresholds.  The ruling states that, “as long as company only makes exempt sales, company would only be required to file a ‘zero’ return . . . each month” (or annually if it qualifies).  One of the impacts of this position is that a business with only exempt sales will create nexus, which means that if it makes even a dollar of non-exempt sales, it must collect and remit sales tax on that transaction.

The second item to highlight involves Philadelphia’s Business Income and Receipts Tax (“BIRT”).  The BIRT contains both a gross receipts tax and a net income tax, and taxpayers historically were subject to one or both portions based upon the level and nature of the taxpayer’s activity within Philadelphia.

Effective for tax years beginning on or after Jan. 1, 2019, Philadelphia adapted Wayfair’s economic nexus standard to subject taxpayers to the BIRT.[5]

As a result of the newly amended regulations, a business with no physical presence in the city is considered to have nexus and is subject to BIRT if it (1) has generated at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year, and (2) has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution.  The regulations carve out the protection from net income-based taxes under the federal Public Law 86-272 for certain sellers of tangible personal property whose activities in the city are strictly limited to certain types of sales solicitation.  If this federal law applies, however, a business outside the city can still establish economic nexus and be subject to the gross receipts portion of the BIRT.

Before the Wayfair decision, about 10 states already enforced factor-presence nexus rules for income tax purposes (these rules create income tax nexus if one or more of the taxpayer’s apportionment factors exceed a certain threshold).  However, these factor presence nexus rules generally used much higher sales factor thresholds, such as $500,000 (in New York, the threshold is $1 million).  We will see if Philadelphia’s $100,000 threshold is the beginning of a trend for jurisdictions to adopt Wayfair-like nexus rules for income taxes.  In addition, we may see more local jurisdictions jump on the Wayfair bandwagon.

If you are concerned about your company’s sales tax and income tax obligations in this post-Wayfair world, Aprio’s SALT team can analyze your state nexus positions and give you the guidance you need to remain in compliance with your state tax obligations and avoid unnecessary state tax liabilities and penalties.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the April 2019 SALT Newsletter.

[1] See “Wayfair and Sales Tax Nexus: Let the Aftermath Begin  and “Wayfair and Sales Tax Nexus: The Aftermath Part 2”.

[2] Indiana Revenue Ruling No. ST 18-06, 01/07/2019 (released March 2019).

[3] IN Code §6-2.5-5-20(a).

[4] IN Code §6-2.5-2-1(c).

[5] Philadelphia Business Income and Receipts Tax Regulations §103

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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