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States Could Lower Nexus Thresholds to Address Revenue Shortfalls

Posted on Apr. 30, 2020

States could lower nexus thresholds for remote sellers to shore up revenues that have declined because of the COVID-19 pandemic, according to policy groups. 

“I think we are unfortunately likely to see additional efforts to impose tax obligations on smaller sellers, but I don’t think they’re likely to amount to a whole lot in revenue,” said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation.

After the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair Inc., states enacted rules through legislation or regulations requiring remote sellers without a physical presence to collect and remit sales and use tax.

Most states enacted sales and transaction thresholds mirroring those in South Dakota’s S.B. 106 — annual sales in excess of $100,000 or 200 separate transactions within the state. However, some states adopted higher sales thresholds for remote sellers, including Alabama, California, Mississippi, New York, Tennessee, and Texas.

Those states “may see moving those [thresholds] down as being something that would be appealing to them,” according to Moylan. He also said he expects states will more aggressively pursue tax collections from remote sellers, which may include collecting taxes retroactively, adopting marketplace facilitator laws, and auditing remote sellers.

States have several options to meet balanced budget requirements, including raising taxes, cutting spending, or tapping into rainy day funds. Noting that it's unclear how large the budget shortfalls will be, Moylan said he'd prefer that states reduce wasteful and inefficient spending before considering tax increases. 

“I think that the overwhelming likelihood is that the amount of assistance that will come from the federal government will make a very significant dent in whatever problem it is that states are facing,” Moylan added.

Jared Walczak, director of state tax policy at the Tax Foundation, agreed that states may seek to reduce nexus thresholds for remote sellers in order to generate revenue, and he said states may also use employee relocation under remote work policies to argue that a company is now physically present in the state. However, he said that in both cases “the revenue would be minimal and both the administrative and compliance costs high.”

“Reducing safe harbors or playing games with nexus standards could also lead to litigation, tying up revenue collections and creating new costs for a state at a time when they can't really afford it,” Walczak added.

Observing that state sales tax revenues are plummeting because of the pandemic, Carl Davis, research director at the Institute on Taxation and Economic Policy, said that collecting the sales tax dollars that are already legally owed on online purchases is a logical place to begin chipping away at that problem.”

Davis said states that set their nexus thresholds higher than South Dakota's should “look seriously at lowering their thresholds to match South Dakota.”

“I’d be wary of setting a threshold that’s significantly lower than South Dakota’s, however, since it’s unclear how the courts will react,” Davis added.

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