In the 2018 South Dakota v. Wayfair case, the United States Supreme Court held that states can require certain retailers with no physical presence in a state to collect and remit sales and use taxes on sales delivered to locations within their state. In this case, South Dakota required out-of-state sellers of “tangible personal property” to collect and remit sales tax “as if the seller had a physical presence in the state.” The law applied only to sellers with revenue over $100,000 in South Dakota, or 200 or more separate transactions in the state within one year.
The issue before the Supreme Court centered on whether the U.S. Constitution’s Commerce Clause permits states to require remote sellers to collect and remit the state’s sales/use tax. The Court overruled its earlier cases, and found that modern technology allows companies to establish a “substantial nexus” with a state without a physical presence. In the Wayfair case, the online retailers engaged in a significant quantity of business in South Dakota and had an “extensive virtual presence” sufficient to establish a “substantial nexus” with the state. Thus, the Court held that the retailers could be subject to the state’s collection and remittance requirements. Following the Supreme Court’s decision in Wayfair, other states enacted similar laws requiring remote sellers to collect and remit sales and use taxes.
In the automotive world, suppliers are generally not concerned with sales and use tax “economic nexus” issues because their sales are typically exempt from these taxes under “industrial processing,” “sale-for-resale” and other sales and use tax exemptions. However, automotive suppliers should be aware of various states’ attempts to expand the “economic nexus” concepts to state income, franchise and similar taxes. This expansion means, for example, that an automotive supplier may be liable for state income tax where there is substantial sales activity in the state, even though the supplier does not have an office, employees or other “physical presence” in the state.
For example, effective January 1, 2020, Pennsylvania law provides that companies have a corporate income tax filing requirement if they have $500,000 or more of sales sourced to the state, regardless of physical presence. Similarly, Texas has amended its franchise tax regulations to provide an economic nexus threshold of at least $500,000 in Texas sales. And in 2020, the Michigan Court of Appeals remanded a Detroit income tax case to the Michigan Tax Tribunal to consider nexus issues in light of the Supreme Court’s decision in Wayfair. See Apex Laboratories International, Inc. v. City of Detroit, 331 Mich. App. 1; 951 N.W.2d 45 (2020).
Automotive suppliers should consult with their accountants and attorneys to determine the status of the income/franchise tax “nexus” in states where they ship goods. Please contact your Warner Norcross + Judd attorney to review these issues in more detail.