From Sales to Income Tax: States Are Watching

Meredith: 00:00:35

Welcome to SALTovation.

The SALTovation show is a podcast series featuring the leading voices in salt where we talk about the issues and strategies to help you make sense of state and local tax.

Intro: 00:00:46

Welcome back to the SALTovation Podcast. Today we're joined once again by one of our favorite recurring guests, Diane Yetter from the Sales Tax Institute.

Diane brings her deep insight and policy level perspective to the table as we unpack a major trend affecting sales sales tax nexus, the rollback of the 200 transaction threshold in several states. We dig into what's happening, why it matters, and how businesses, especially small sellers, need to think beyond just economic nexus.

Meredith: 00:01:19

All right, everyone, welcome back to the SALTovation Podcast. We have our favorite recurring guest, Ms. Diane Yetter with the Sales Tax Institute with us today.

So thank you, Diane, for joining us again on the Saltivation Podcast.

Diane: 00:01:34

I'm thrilled to be here, both of you. I'm excited.

Meredith: 00:01:38

So let's start with a big trend that kind of both of our groups had identified in our issues to watch lists and that is revolving around the states that have repealed their transaction thresholds for determining nexus, kind of under the Wayfarer standard that started with $100,000 and 200 transactions and there are about or at least 14 so far who in various stages of kind of Wayfair have eliminated that transaction threshold. And we've seen a lot of states kind of continue on with this trend. Why do you think this is occurring?

Diane: 00:02:20

Well, I think this definitely goes to the undue burden on small sellers in particularly in particular, I should say.

at I really brought out in my: 2022

And the streamlined sales tax governing board, after my 22 testimony made a recommendation to all of the streamlined states that they eliminate the 200 transaction count. They saw that as a valid point that I made in my testimony and that it was a big risk to some potential federal legislation that might happen.

I truthfully don't think anything's going to happen, but I think it's great that the states listened and recognized that. And so in 23, we had South Dakota eliminate theirs, we had Louisiana eliminate theirs, and then North Carolina.

We also just this year Utah just passed theirs. That will be effective July 1st. New Jersey has a bill pending. So I just saw the latest update the legislature asked for a fiscal note.

The executive branch came back and said, we can't quantify it. So it was kind of an interesting discussion of then legislative research wrote something up that was interesting.

And then there had been a rumor that Illinois was going to eliminate it. I had talked to the. The director last fall. He was not aware that any of this sort of stuff was happening.

And then I saw him a month later at another conference and he announced that this was something he was going to take up. It just got added last week as an amendment to Senate Bill 752. So we will track that. That would make it.

That would eliminate it as of January 1st of next year. So I think these are all great things. I think this is eliminating a burden for the smallest of the sellers.

And I think it's a really smart move of all the states to be doing this.

Meredith: 00:04:56

So would you say this is a kind of taxpayer win?

Diane: 00:04:59

It is definitely a taxpayer win.

You know, the thing that you have to watch out for, you know, particularly those really small sellers, many of them sell on Amazon and they have their inventory in Amazon states. Now, some of the states have said that Amazon inventory will not create physical presence. Illinois is one of those states.

And so what you have to watch out for is remembering, and we run into this every time we talk to a new client is they think the only economic or the only nexus they have to worry about is economic nexus, not realize that a remote employee in a state or a inventory in a state or traveling in and doing service in a state that all of that can create that physical presence that actually makes it much more challenging. And so these eliminations of the transaction counts only work if you are truly a remote seller.

Intro: 00:05:57

So Illinois, I guess, directive on the physical presence piece and the inventory not creating, you know, that duty then is did they put that out in a regulation or how did they announce that.

Diane: 00:06:13

It is not statutory? I'm trying to remember if it actually went in a reg or if it's just in. I think it's just in their remote seller bulletins that they came out.

And in: 2020

Intro: 00:06:33

I think that's interesting for our listeners too, because, you know, we get those questions a lot, even on the income tax side. Right. And so I think, you know, there it just is a little bit of a cautionary tale, right, that maybe it might not create sales tax nexus. Right.

But there still could be the income tax nexus that could be triggered just depending upon this, the state and what maybe they've addressed in their.

Diane: 00:06:57

Exactly.

Intro: 00:06:58

You know, in their, in their publications or whatever the case may be.

Diane: 00:07:02

Right.

And I think, you know, the New Jersey bill, actually, because if, if you follow it from the income tax perspective, New Jersey has taken the position that the economic nexus threshold of 100,000 or 200 transactions is not only for sales tax, but also for the corporate income tax. And so this proposed bill eliminates it from both sales tax and income tax.

So at least New Jersey is recognizing that it has to make that change, you know, to both of those, you know, but separate from that, you know, the states that are pursuing nexus, you know, we have seen, as I'm sure you guys have, Michigan has started getting very active on sending notices to companies that may be registered for sales tax and not registered for income tax or that they maybe didn't register early enough. And so those started coming late last year.

And another round just went out because we've got a new round of people calling us and saying, I just got this notice from Michigan. What do I need to do?

And we've gone back to Michigan with a couple of clients that have really de minimis inventory in an Amazon warehouse, and they're saying, we don't care that it's an average of $100 of inventory in the state. That's physical presence, and you're subject to income tax. So we're starting to see that raise its head a little bit more.

And I think you're exactly right, Stacy, that sellers that are only looking at this from the sales tax perspective really need to look at it from the income tax perspective, too.

Meredith: 00:08:47

Well, and what about if, you know, illinois repeals their 200 transaction tests, but effective one 1, 20, 26, what if you've had 200? Like, if you're doing kind of a nexus study now, you have more than 200 transactions now, but then you won't.

Diane: 00:09:05

That's your own.

Meredith: 00:09:06

You know, you don't exceed the dollar value. What about kind of this purgatory period of history versus what the rule is now? It's like, do you just kind of let it be? Because under the guise of.

And this is not tax advice for any listeners who may be applying. Right. Like, just kind of food for thought on. Okay, well, is it kind of the intent of the state to just kind of.

It's not material because we're willing to get rid of it. It's like the rules are what they were for this kind of window of time, and they're not now. So, like, how do you play that game.

Diane: 00:09:38

Yeah. I think it's a question that has to be looked at on a case by case basis and even a state by state basis.

first repealed theirs back in: 2019

And Washington said we're not going to pursue for those six months. But where we're talking, you know, seven years, I can't imagine that Illinois is going to walk away from that.

I think if it's, you know, just recently that you crossed, they might walk away from it.

But if it's going back to: 2018

You know, because all of these states that we're talking about, Illinois, it's a rolling, you know, 12 month look back. But you know, Utah, New Jersey, those are current or priority year.

And South Dakota, when they repealed theirs, said you had to, it was repealed as of July 1 of 23.

But because of the current or prior year, if you in January through June of 23 exceeded the 200 transaction counts, you had to stay registered through the end of 24 is how South Dakota interpreted that.

Meredith: 00:11:28

Oh, interesting. Yeah.

Diane: 00:11:30

You know, now North Carolina, they said if you were even if you were above the 200 transaction count, but you were below the 100,000 in January through June of 24 because theirs came out July 1 of 24, you could deregister as of July 1 of 24. Indiana also repealed theirs last year and they repealed theirs retroactive.

I think the bill passed in like March or April and they repealed it back to January of 20. And so they said if you were below it in 24 or in 23, you could drop as soon as the bill was passed.

So it'll be interesting to see how Illinois kind of interprets that. That isn't in the proposed bill.

It is a question in the streamlined disclosed practices that we got added into Disclose practice number eight that asks the streamlined states when can you deregister if you if the state has dropped. So we'll have to see how Utah and subsequently New Jersey, if it passes, how they answer that question.

Intro: 00:12:38

Yeah, it's good to, it's good to know. And, or as a reminder for the listeners. Right.

That, I mean, let alone all the, like, enforcement dates versus, you know, enactment dates just from the, you know, from when Wayfair was passed.

Meredith: 00:12:54

Right.

Intro: 00:12:54

And then we're, we're struggling with some of that, with some of these, you know, repeals of the, of the transaction count and, or if, you know, some of these states have even changed their thresholds. Right. So it's, it's, these are constant struggles. Right. To know. Okay, do you do it like when you mentioned South Dakota. Right. That's trailing nexus.

Right. They, they, they kept with that trailing nexus, but maybe like you said, some of those states didn't. Right.

So it really is hard for taxpayers to keep track of and continues to be.

Diane: 00:13:29

Right.

And the other kind of slightly related trend, you know, streamlined within their disclosed practice that we worked on to get all these questions answered. One of the things that came out of it is some of the select questions. The streamlined governing board agreed to define a best practice.

So this is the best practice for the state. And removing the 200 transaction count, that was a best practice that got adopted.

And then more recently, we got passed an adoption that the grace period after when you cross the threshold that you don't have to Register until the 1st of the month following 30 days after you cross the threshold. South Dakota was a next transaction state and this year they passed legislation that it moves it out to the first of the month following 30 days.

So south Dakota is definitely taking the lead on making these changes, which I think is great since they were the state in the case.

Intro: 00:14:34

Right, right.

Meredith: 00:14:35

And so, you know, we've talked about Illinois already, which is, you know, for those who haven't listened to Diane's first and second previous episodes, you know, is based in Illinois. And we talked about the last time we talked pet meds was still, you know, we hadn't gotten a decision out of pet meds.

And so do you want to maybe talk us through or catch us up on, you know, the results of pet meds, what the legislator did as a result of that and how that's kind of impacting taxpayers and, you know, maybe we need to bemoan some things, maybe not, but kind of catch us up on kind of what happened with Illinois and the leveling the playing field and what's come out of that?

Diane: 00:15:25

Sure.

, Illinois, probably prior to: 2021

And the tax rate is dependent upon where the seller is located for sales that originate outside of Illinois or where inventory comes from outside of Illinois that is subject not to the retailer's occupation tax or sales tax, but to the use tax. And the use tax has no local tax. It is only the six and a quarter percent rate.

So for any sellers, remote sellers or even sellers with physical presence in Illinois, but maybe the inventory and the order acceptance and everything came from outside of Illinois, the they would only have a requirement to collect tax at the 6.25% rate. Now there's a long sordid history of how you determine what is the origin of the transaction.

With the leading case back now, gosh, I've lost track of what year it was. The Hartney Oil case, I think that's the right name, Hartney Oil.

ay. And so that was in place.: 2018

So the only rate that is being charged is the six and a quarter percent state rate. And all of the locals are up in arms screaming where's our wayfair money? Where's our way for money? We're not getting any of this money money.

ve, why am I drawing a blank?: 2020

And that meant that all of these remote sellers were required to charge sale, state and local rate at the destination. So that remote seller, let's say it's you guys, you're located in Colorado, you're a retailer, you're selling to me in Chicago.

The Chicago rate is 10 and a quarter percent, but the use tax rate was just six and a quarter. So you were charging me six and a quarter percent rate. This law went into effect, you now had to charge me 10 and a quarter percent rate.

And so the argument that was made because Illinois is an origin state is I could buy from a vendor in another city in Illinois at a rate lower than 10 and a quarter percent. And now this out of state merchant is disadvantaged and is required to charge a higher rate than what an in state vendor.

And so for a constitutional challenge to this is what happened with Petmeds was the first one that that did that.

There's been a number of other cases that are in the works right now that made the argument that this was a unconstitutional law change because it did put a higher burden on out of state sellers than on in state sellers.

We have a prior case from Missouri, the associated industry case from the late 90s that went to the Supreme Court that said you can't have a higher rate imposed on out of state sellers than in state sellers. So that was the argument that Pepmeds made along with these other cases. We were hopeful that we were going to get a decision on this.

That petmeds case ended up settling, so we don't have a decision on that yet. There are still some other cases in there. But what happened In January of 25, Illinois changed the law once again.

That said now all out of state sales, whether the seller has physical nexus in Illinois or not, if they were only required to collect six and a quarter under our crazy 11 prong test, they now have to collect tax at destination sales tax. And so I think Illinois thought that this change would make their constitutional challenges go away.

But all it did was it made more businesses now subject to this unconstitutional challenge. And discrimination really is what it is.

Because still if I buy from an in state seller that has a lower rate than this out of state seller, I as an out of state seller am discriminated against. So it'll be interesting to see what happens.

This bill that I talked about to eliminate the 200 transaction count, it has included language that I think is very onerous that says if the seller does not provide all of the documentation of where all the sales went, the department, instead of asking the seller to perfect their return.

So in essence, if they submit an unprocessable return, which would probably mean they didn't attach their local schedule, the ST2, instead of waiting for the taxpayer to submit that to perfect the return, the department has the right to just assess a tax of 15%, which is higher than any other tax rate that exists in the state. So I think they just keep piling more and more discriminatory provisions into their statute.

And I'm hoping to God we get a case that actually gets to the courts.

Meredith: 00:21:32

Well, and that, you know, kind of language in the bill about perfecting the return for those who have never tried to file an ST2. Stacey and I had a conversation about this the other day.

Diane: 00:21:45

It's hard, it's hard.

Meredith: 00:21:48

It's very difficult. Um, and it's long. There's not a simple way to file it.

Diane: 00:21:55

You can't upload it. You can't you know, Missouri is, is notorious also.

But you can at least, you know, upload or send a file to the department and they'll add all the locations for you. Illinois won't do any of that. There's no easy way to do it. And so it is, it is a huge burden. We've talked to the department about that.

They seem like they're willing to listen, but nothing is changing.

Intro: 00:22:21

Yeah, because I mean, not that, you know, we like to win worst state. Right. You know, or nobody wants to. Right.

d so when the rules change in: 2021

Okay, now you know, we know that we need to collect and all, you know, for all the locals, let's start reporting. And then that, you know, became an eye opener where it was, no, this is a very onerous return and takes a lot of time.

And if anybody's familiar with the Colorado return, it's also very onerous and you know, large. But I think Illinois actually might have, have beat us with this, you know, with those changes so. Well, what was funny, you guys might win now.

Diane: 00:23:17

We might, we might. Which we have said to Illinois, you know, you are trying to beat out Colorado, notoriously known as being, being the worst.

And you know what, what I think you know, was, was a little bit comical was when that happened in 21.

Intro: 00:23:39

Was.

Diane: 00:23:41

You had to go in and register at least one locality and then it was supposed to be the rest. As you filed, you would just add them in and it was supposed to be no big deal.

We had a couple of clients that when they did the first return that activated all of these locals, it automatically triggered the mailing of. For every different location you get like a sub license from Illinois. That is a copy of your sales tax license that you're supposed to post.

And each location got their own. They ended up with like 3 copy paper size boxes of licenses that got shipped to them. And I was like, what did this cost the department to print?

And then nail all of these. I'm like, that is insane. And we called the department and said, what do we do with all these?

And they were like, yeah, we couldn't figure out how to suppress that. Just, just shred them all. There's no need to hold on to them. And it was just like, oh my God. What?

Intro: 00:24:51

Wow.

Diane: 00:24:53

You know, at least they got that figured out. That I Haven't heard of that happening again, but that was insane.

Intro: 00:24:59

Yeah, but like, I mean, your earlier point that you made was well heard because we've pushed back on the department as well with, you know, even voluntary disclosure data to say, okay, can you run this through your system? And they will not do it.

Diane: 00:25:17

Right.

Intro: 00:25:18

So I do hope that they will streamline some, some of this going forward because it is really time consuming for taxpayers.

Diane: 00:25:27

Yeah, well, and if you have to do, whether it's a voluntary disclosure, just you have to amended a return, anything for those prior periods. I think they changed the system. I think it was in 24.

So any dates prior to that, they can't take any sort of upload or, you know, you have to manually key it all in to the system. And it is so onerous.

Intro: 00:25:50

Correct. And I mean, we have several voluntary disclosures where we're doing, where we'll have to do PDF returns as well for some of those prior years.

. Because that all started in: 2021

And I guess all we can do is hope that the department will streamline it going forward.

Diane: 00:26:17

They've got to wake up.

Intro: 00:26:18

Fingers crossed.

Diane: 00:26:19

Yes, yes.

Meredith: 00:26:20

Do you think there's any hope that maybe Illinois would go to an election like, you know, Texas did, Alabama did for just kind of like consolidated rate and just be like 9%?

That doesn't violate any sort of, you know, key TAM stuff that you can just kind of elect to be a remote seller, charge a single rate as kind of a troubleshooting mechanism?

Diane: 00:26:45

Yeah, they did.

There is a proposal, and I, and I forgot about this, to check on the status before our call, there are two amnesty proposals that are pending, one from the governor and one from the department.

And in the amnesty proposal by the department, which is only for remote sellers, it is only under that amnesty, instead of having to do all of the locals, that you could do a flat rate. And I believe that flat rate was a 10% rate, I think. And then I think it was a 2% rate if it's the food and drug rate instead of the local on that.

But it was only under that amnesty provision. So, you know, I think that at least helps with the VDA sort of situation. But it's only if you qualify as a remote seller.

And we'll see if those competing, you know, which, which of those competing amnesty bills might actually pass.

Meredith: 00:27:54

When would an amnesty be eligible for kind of. Is it only net new sellers or is it, you know, hey, I either am non compliant because your return is too hard or any sort of.

Just like, hey, we just want to get taxpayers caught up and get the money in the state.

Diane: 00:28:13

It was a little unclear on that, Meredith, because of how the bill was written. I think the governor's proposal is a more traditional amnesty, and it applied for all tax types and for registered and unregistered.

But the department one, I think was only only for unregistered remote sellers, if I remember right.

Meredith: 00:28:35

Well, lots to lots to keep our ear out of the ground.

Diane: 00:28:39

Yes.

Meredith: 00:28:40

Going on in, you know, mine and Stacy's former home state.

Diane: 00:28:43

Yes.

Intro: 00:28:44

Right.

Meredith: 00:28:45

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