During this past year, we have been diligently tracking New York’s stance on “economic nexus” and when the Department finally issued guidance on sales tax collection in the absence of physical nexus pursuant to Notice N-19-1 (the “Notice”). With the issuance of Notice N-19-1 on January 15, 2019, New York officially joined the ranks of the many states that impose economic nexus sales tax collection standards following the Wayfair decision. However, as we pointed out this winter, several outstanding questions regarding sales tax collection remained after Notice N-19-1 was released. Well, the Tax Department must have heard us because, viola, the purpose of these FAQs is to answer several of the questions that have remained for tax practitioners regarding economic nexus.
Highlights of FAQs
Several issues are covered in the FAQs. Some of the more important questions answered are:
- Effective Date – despite the fact that the Department’s original Notice informing taxpayers that the state intended to impose an economic nexus standard was published on January 15, 2019, the FAQs confirm that the state intends to apply this standard as of June 21, 2018, about six months before anyone but us tax geeks knew it existed.
- Lookback Period – the FAQs confirm that the initial lookback period for determining whether the economic nexus thresholds are satisfied is June 1, 2017, through May 31, 2018.
- Service Providers – though the FAQs do not explicitly reference service providers, they only apply the new economic nexus rules to sales of tangible personal property (“TPP”). So it looks like pure service providers with no in-state presence are not subject to these rules. For example, an out-of-state information service provider with no in-state presence would not be obligated to collect and remit under New York’s rules. But be careful here. The FAQs are conspicuously silent on software-as-a-service sales (“SaaS”). We think the Department would treat these transactions as the licensing of taxable TPP, and therefore subject to the economic nexus rules. And any information service providers that use software to provide their services should be wary of the Tax Department characterizing their products as taxable SaaS transactions rather than information services. Such a conclusion would likely bring the economic nexus requirements into play.
- Gross Receipts – we previously questioned whether nontaxable transactions, such as wholesale transactions, would count toward the economic nexus thresholds ($300,000 and 100 transactions). The FAQs emphatically answer this question in the affirmative, concluding that it does not matter whether the sales are taxable or exempt.
- Intermittent Nexus – because the nexus thresholds are measured during the “immediately preceding four sales tax quarters,” a vendor can have nexus intermittently, on a quarter-by-quarter basis. The FAQs confirm this result, indicating that if sales fall below the applicable threshold, vendors “can file a final return and stop collecting New York State sales tax.” The FAQs caution, however, that:
“You may prefer to remain registered in case you meet the thresholds in the future, but if you remain registered for sales tax, you must file sales and use tax returns for each reporting period, even if your business made no sales or did not make enough taxable sales to require you to collect sales tax for New York.”
Obviously there are many reasons why a business wouldn’t want to “turn on and off the tax” on a quarter-by-quarter basis, but this could be a useful tool in dealing with a future audit liability.
Also addressed, as noted right in the FAQ title, are the registration requirements. Making sure your business is registered as a sales tax vendor, if applicable, in order to collect and remit sales tax can be done at Register as a Sales Tax Vendor. If you meet the thresholds at a date after the June 21, 2018 enforcement date, you should register for New York State sales tax and begin to collect and remit tax. If you should have registered previously but failed to do so, New York’s voluntary disclosure program is an option. Give us a call if you’d like to discuss this option.
