A U.S. Supreme Court decision earlier this year opened the door for states to collect sales taxes from out-of-state businesses, but according to one tax attorney, that may be just the beginning; the ruling, however, may have much wider implications, particularly for New Jersey businesses.
The court said that cities and states can require out-of-state companies to collect sales tax and remit it back to them if they have $100,000 or more in sales or at least 200 transactions in their jurisdiction. The New Jersey Legislature quickly passed a bill in June, which Gov. Phil Murphy applauded in a conditional veto message on Monday that asked for modest revisions aimed at assisting the state Division of Taxation in administering the law.
On its face, the court would seem to have leveled the playing field for in-state stores that have had to collect what was until recently a 7 percent sales tax. But Jaime Reichardt, a tax attorney with Sills Cummis & Gross, P.C., said New Jersey companies should look at how the law impacts them before they celebrate.
“If you are earning six-figures in revenue from any state, you have to start thinking about not just sales tax, but an income tax filing requirement,” Reichardt said.
The legal term for a connection between a business and a state is “nexus.” Until June, the Supreme Court had maintained that a nexus for tax purposes meant that a business must have a physical presence there. In a case called South Dakota v. Wayfair, which said a nexus could exist based on economic activity alone.
“Sales tax is a big issue, but I think it left open the door for any state for any state or local jurisdiction to impose tax reporting requirements on any company for just merely having a customer in that location,” Reichardt said.
It’s not limited to internet sales either. Providing products such as market research, software as a service or any kind of data processing to customers in other states now have to consider tax liabilities with those states as well.
Some states have already been doing a version of this, including California, New York, Connecticut, Colorado, Michigan, Tennessee, Ohio and Alabama. Businesses that have no physical presence in these states have had to pay income taxes to those state governments because they have had sales there, Reichardt said.
“I’m already seeing states sending out audit notices or inquiries to companies,” he said.
Companies that have substantial out-of-state business should have a conversation with their tax attorney or accountant and ask them to take a closer look at what that state’s tax rules and guidance are.
“Your large corporations are already doing this, but small business that have 10, or 20, or 50 employees constantly have nexus issues,” Reichardt said.