Businesses that know they need to register for sales and use tax may be dragging their feet in deciding when to go through with it. Between June 2018 and April 2019, many businesses have gone from being registered only in the states they are physically located in to needing to register in many states across the country. As the dust has settled from the SCOTUS case that allowed for these broader sales tax laws, South Dakota vs. Wayfair , business owners have come to the frustrating realization that a large burden has been dropped in their lap in the form of indefinite sales tax compliance on a larger scale than they ever anticipated.
While this painful new reality has become clearer each month as states adopt legislation defining thresholds which create sales tax nexus, it is not so clear when businesses really need to register. Is it the date the legislation is passed? The date the legislation becomes effective? What about the date upon which the business surpasses the economic nexus threshold? Or the subsequent month or year after that threshold in surpassed?
Just as the sales tax economic nexus thresholds vary state to state, the answer to this question varies as well and many states do not offer a clear answer.
The Calendar Year
Some states, like Georgia, require you to look at the preceding or current calendar year. Georgia, for example, has a convenient economic nexus effective date of January 1, 2019. Businesses, therefore, can pull a report of their 2018 sales into Georgia, determine if those sales meet the threshold ($250,000 or 200 or more sales), and then register effective January 1, 2019, if necessary.
Going forward, businesses who did not reach those thresholds in 2018 may reach them instead in 2019. If that is the case, there are two trains of thought regarding when a taxpayer should register: (1) the month immediately after that threshold is surpassed; and (2) January 1st after the threshold is met. The first is clearly the more conservative approach, but there is a strong argument for the second option because of the use of “calendar year” in the law.
For example, an out-of-state business makes $80,000 in sales into Georgia in 2018. Therefore, they do not register on January 1, 2019. After the new year, sales pick up and the out-of-state business makes $60,000 in sales in January 2019 and $60,000 in sales in February 2019 to Georgia customers. Do they register in March 2019 or January 2020?
Some states will take the position that you should register and start collecting sales tax in March 2019. However, the use of “calendar year” in the statute and its plain meaning definition of the period from January to December, suggests the contrary. Further, for practical purposes, the “calendar year” is much more convenient and generally preferable for taxpayers. Imagine a scenario in which you make one $100,000 sale on February 28th and suddenly cross the threshold with no lead time before being required to collect and remit the following day. It is for this type of situation that some taxpayers take quite literally the term “calendar year” for its plain meaning of January through December. As the end of the calendar year approaches, businesses should generally be able to anticipate whether they will cross the economic threshold and have time to prepare for registering on January 1st the subsequent year.
Preceding 12-Month Period
Other states, like Illinois, use the preceding 12-month period measurement date as an alternative to the “calendar year” used by other states. While the calendar year leaves ambiguity as to when taxpayers are obligated to register with the state, the preceding 12-month period does not share the same problem.
In the same scenario described above, in which someone makes a large sale on February 28, 2019, the result in Illinois would be that the taxpayer established nexus in February and therefore must register, collect, and remit beginning March 1, 2019. There is no reasonable reading of “preceding 12-month period” that could allow for the liberal interpretation that may apply in other states, allowing businesses until January 1st of the subsequent year to become compliant with a state.
It is important for taxpayers making sales into a state with the preceding 12-month period measurement date to realize that a nexus evaluation is an ongoing process. Whereas taxpayers making sales only into states that have the calendar year measurement date can potentially wait until December of each year to identify any new states with which the business has nexus, those making sales into states with the preceding 12-month period measurement date cannot. Rather, they must evaluate their sales either on the last day of each month or on an on-going basis to anticipate when the threshold will be surpassed and registration becomes required. Most companies with consistent sales will be able to anticipate these thresholds months before they are approached. However, businesses that make low quantity, high dollar amount sales may find themselves with little to no notice that they will need to register.
New Economic Nexus States
States that have just passed economic nexus legislation or are in the process of doing so create a different problem. For example, consider a state that has a calendar year measurement date in their economic nexus legislation. The effective date of the legislation is April 1, 2019. Company A does surpass the threshold in 2018, but does not do so in 2019. Is the preceding year to be considered for nexus purposes 2018 or 2019? There is an argument to be made on both sides.
On one hand, the preceding year of 2019 is 2018. Therefore, there is a position that when the law becomes effective April 1, 2019, Taxpayers must evaluate their 2018 sales to make a determination of whether they should register. The language of the statute identifying the preceding calendar year would appear to support that.
Meanwhile, the law is inapplicable to 2018 and the calendar year of 2019 precedes the legislation by three months. Therefore, there is a position that sales in 2018 are not to be considered for nexus purposes and the “preceding calendar year” can only go back three months prior to the April 1, 2019, legislation. Under this theory, the very first possible date to register in the example state is January 1, 2020. However, in this example, because Company A does not have nexus in 2019, they do not need to register at all.
It should be noted that this is an aggressive position to take and not all states will agree. California, for example, has an effective date of April 1, 2019, for their economic nexus legislation. However, despite being late to the game and enacting an effective legislation date well into 2019, the state has notoriously been aggressive in pursuing taxpayers for back taxes. Only time will tell how future audits handle this issue, but taxpayers taking an aggressive position may want to consider the consequence of paying a year of back taxes if a state disagrees.
When it comes to deciding when to register, businesses are left with many options and few clear answers. Ultimately, the decision boils down to dollars, risk, and what a business is comfortable doing. Whether a business wants to take an aggressive position to save money now, in hopes that it doesn’t come to bite them down the road in a potential audit, is a decision that hinges on facts unique to the business that may fall far outside the scope of sales and use tax. Business owners unsure of how and when to proceed, should consult a sales tax professional so they can make the best decision going forward for their business.