By now you have probably heard that on June 21, 2018, the Supreme Court issued a ruling in the case, South Dakota v. Wayfair.  Historically, nexus, the minimum connection a business must have with a state to be required to abide by that state’s sales and use tax laws had been determined using a physical presence test.  However, in addition to a physical presence test, the Supreme Court’s decision upheld an economic test now called “economic nexus”.

The South Dakota v. Wayfair decision upheld South Dakota’s law stating that if a business sold more than $100,000 in goods or services into a state or engaged in 200 or more separate transactions that the business had nexus with South Dakota and therefore, must abide by South Dakota’s sales and use tax laws.  This is monumental change in the world of sales tax and many states quickly passed laws to capitalize on this change.

So why is this your last warning?  Because now it has been more than 3 years since the decision and 3 years is how long a typical audit covers.  States like South Dakota who have had a valid economic nexus law on their books for 3 full years have started conducting full audits on many, many more businesses than they have been able to in the past.

Furthermore, because of the pandemic, many states are in need of additional revenue.  If they can obtain funds from out-of-state businesses, it would be helpful to their own in-state businesses and their residents.  Many out-of-state vendors are going to be seeing increased audits going forward and it would not be surprising to see states initiate those audits at their first opportunity.

The first thing we recommend is that you stratify your clients’ annual sales by State.  In any state where your client has done more than $100,000 in annual sales you should have a plan in place on how to deal with nexus.  Perhaps its time for a Voluntary Disclosure or Quiet Registration.  A voluntary disclosure is when you go to the state and work out a settlement for a client tax problem which is UNKNOWN to the state.  Generally, you get penalty and interest waivers and limited lookbacks.  Or you can just register (quietly) for only prospective taxes and hope the State doesn’t catch any prior problems.

Written by Mark L. Stone, CPA.  Managing Partner of Sales Tax Defense LLC, 2000 Deer Park Ave., Deer Park, NY  11729.  mstone@SalesTaxDefense.com   631-491-1500 x 11