In 2018, the Supreme Court of the United States heard a sales and use tax case, South Dakota v. Wayfair, Inc., which rocked the very core of the state and local tax community. The foundation of state and local tax law, which had been in place for over 50 years, was cracked by the Court’s opinion. Laws were repealed and case precedent was deemed invalid, forcing states to rebuild from the ground up. How could one case cause such widespread pandemonium? Easy – it changed the rules of nexus.
In the five years since the landmark Wayfair case, I have received countless calls from people in a variety of industries asking me what the deal is with this “nexus thing.” Usually, they have piecemealed information from the internet and have Frankensteined an understanding of state tax law which is wildly inaccurate. I can’t blame them for trying – I do the same on WebMD – but the result of their research can sometimes provide a false sense of security which could be expensive down the road if uncorrected.
In 2023, its important for every business owner to have a general understanding of nexus and where their business may have it. This article will provide a brief overview of sales and use tax nexus in the United States with an emphasis on Florida.
What is Sales Tax Nexus?
In its simplest form, nexus is a connection between a business and a state. If I open a pizza place in my city in Florida, can California send me a bill for the sales tax on my pizzas? Of course not. But what if my pizzas are so great that I begin selling them, frozen, across the country, to states including California? What if, instead of shipping my pizzas directly, California customers purchase them through the popular food site Goldbelly.com? You can see how easily the question of whether California can tax a Florida pizza place can be complicated.
In order for a state to figuratively reach its arms out across its borders and into your bank account, that state must have nexus for state tax purposes. For over 50 years, the rule was quite simple. In order for a state to impose its taxes on a business, that business had to be physically located within the state. In the pizza example above, it would mean that I either needed to open a restaurant in California, or store my inventory of pizza boxes in California, or hire employees in California. Simply shipping pizzas into the state would not qualify as physical presence. The business itself needed to be there in some way.
This rule was fair for a long time until the rise of e-commerce changed the way businesses operate. Now, instead of a business physically growing into states, a business could remain in one state but exponentially grow its sales into other states through the internet. You may remember that awkward time in state tax not too long ago when you could purchase items “tax free” (surprise – you were supposed to be remitting use tax on those purchases to your state) on the internet instead of paying tax in the local store. On higher cost items, like TVs, you could save a good amount by passing on the local Circuit City near your house and ordering on Amazon.com instead. How could brick and mortar stores compete? Well, when is the last time you drove by a Circuit City?
The short version of the story is that local businesses were upset. How could they compete with these “tax free” competitors from out of state? Meanwhile, states weren’t happy either. They were supposed to get their cut on every sale made within its borders. If sales inside the state are down because people are purchasing items online instead, state tax revenue is down as well. After much a long legal battle, the Wayfair case acknowledged that the physical presence nexus standard doesn’t work anymore and created a new path for states to tax out-of-state businesses: economic nexus. Economic nexus allows states to impose their taxing authority on businesses that don’t have any physical presence within their borders if the business meets a certain threshold of sales.
Today, a business can have nexus with a state either through (1) physical presence in that state; or (2) meeting certain economic thresholds which can vary state to state. This may seem clear enough, but the problem currently faced by taxpayers and tax practitioners alike is that each state interprets both thresholds differently.
2023 Nexus Issues in Florida
Unlike more aggressive states, Florida was slow to enact economic nexus in the wake of Wayfair. It was not until July 1, 2021, that Florida enacted a $100,000 economic nexus threshold. What this means is that any out-of-state business making $100,000 sales or more within a calendar year will be required to register to collect and remit sales tax in the state.
From a practitioner’s perspective, there was great excitement right when the law passed. Large businesses operating in many states were already familiar with economic nexus from having to register in other states. Adding Florida to the list was something that needed to happen quickly but was not otherwise something to be concerned about. All that was left to do was wait for the audits to begin three years later.
Two years into that wait, I am seeing a new wave of taxpayers reaching out. These are mid-size or small businesses who may not have heard about the Wayfair case or economic nexus until they were notified of it from customers or vendors. These taxpayers are treading into murky waters for the first time. Some of these taxpayers may qualify for a voluntary disclosure program which could limit their liability going back.
In addition, new businesses which may not have met the threshold back in 2021 are now reaching out as their presence in Florida has grown. Many of them are nervous to encounter taxing authorities outside of their home state where they are unfamiliar with the laws and regulations.
However, in 2023 I am most concerned with the taxpayers who are so focused on economic nexus that they have forgotten physical presence nexus still exists. It is not uncommon for a person to call me with a question as to economic nexus in Florida only to discover they have had physical presence in Florida for five years.
Many business owners do not realize the potential implications of having remote employees operate in foreign states. During the Covid-19 pandemic, the state of Florida did not have the same restrictions on individuals and businesses as other states. People who did not agree with the way their state and local governments policed their movements left and many of them came to Florida. Benefiting from the weather and lack of an income tax, many of them stayed and remain here today working remotely.
While in some states, even one employee can create physical presence, there is an argument in Florida that physical presence nexus requires more than just the minimal interaction with the state. Many years prior to Wayfair and economic nexus, Florida had a case called Florida Department of Revenue vs. Share International, Inc. To what extent Share protects businesses that have a minimal physical presence in the state remains unclear.
In addition to employee physical presence, businesses which operate across the country may have inventory located in Florida and not even know it. When using a third-party for logistics purposes, it is possible that inventory comes to rest within the state without the third-party notifying the business. Increasingly, the Florida Department of Revenue is auditing businesses for physical presence nexus when it is discovered that inventory has made its way into the state. No taxpayer wants to learn about their physical presence in a state through an audit.
Frustratingly, once a business has nexus with Florida, it’s very difficult “lose it.” While many businesses jumped to register the moment Florida’s economic law passed, I have seen some of those businesses look for a retreat from Florida’s taxing authority. This is another new, unclear, and therefore complicated aspect of Florida nexus.
Conclusion
Whether you are a Florida business operating in other states, or an out-of-state business operating in Florida, it is important to be familiar with what sales tax nexus is and how it works. For many states, we are at the point of time when a full audit period has elapsed since the enactment of economic nexus. Meanwhile, more states are gearing up to audit foreign sellers as time goes on. While it is difficult to become an expert in the area, a global understanding of nexus can help to prevent taxpayers from being blindsided down the road. If you can just identify the problem, then you can team up with a tax lawyer to fill in the blanks and solve it. However, that tax lawyer can only help you if you take the first step to contact them.
Jeanette Moffa is a partner in the Fort Lauderdale office of Moffa, Sutton, & Donnini, P.A. She focuses her practice in Florida state and local tax, with an emphasis on sales and use tax. Jeanette provides SALT planning and consulting as part of her practice, addressing issues such as nexus and taxability, including exemptions, inclusions, and exclusions of transactions from the tax base. In addition, she handles tax controversy, working with state and local agencies in resolution of assessment and refund cases. You can learn more about Jeanette HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.0596, Fla. Stat. Taxation of Remote Sales
Section 212.05, Fla. Stat. Sales, Storage, Use Tax
ADDITIONAL RESOURCES
2021 Florida Economic Nexus Passed, by James Sutton, Esq., Published April 9, 2021
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.
FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.
2021 Florida Economic Nexus Legislation, by James Sutton, Esq., Published February 1, 2021