Economic Nexus and State Tax Due Diligence: What Buyers and Sellers Should Know | Podcast

Private Equity in Motion

In this episode of Weaver: Beyond the Numbers, Private Equity in Motion, Sean Muller and John Westbrook break down how economic nexus is reshaping state sales and income tax obligations, particularly after the Wayfair v. South Dakota decision. They discuss common nexus thresholds, the role of P.L. 86-272 in income tax and why physical presence still matters for compliance. The conversation also covers filing obligations, trailing nexus rules and key considerations for sellers operating across multiple states during due diligence.

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Detailed Description of Economic Nexus and State Tax Due Diligence: What Buyers and Sellers Should Know

00:00:00
Sean: This is Sean Muller, and John Westbrook is joining me as we continue talking about state tax issues that are coming up on due diligence.

So now we’re going to talk about economic nexus. All right.

00:00:09
Sean: So, John, we’ve had this P.L. 86-272, which we always talk about if you’re just selling goods and you’re not in a state, then you should be okay, right? But in the last few years, this economic nexus concept has become widespread.

What is it? Talk to me about it.

00:00:26
John: Yes. So economic nexus is the set of regulations that came out of the Supreme Court’s ruling in Wayfair v. South Dakota.

In that, the court determined that you don’t have to have a physical presence in the state anymore to establish nexus with the state if your only contact is selling goods or services sometimes into that state.

00:00:50
John: And so, the states after that 2018 ruling, took a few years to try to figure out what their next thresholds would be. Those ended up around $100,000 in sales or 200 transactions.

It’s kind of the general guideline with some variance in those thresholds.

00:01:08
John: And what that means is that regardless of your physical activity and regardless of where your employees work from or where the items that you’re shipping legally pass title, if you’re effectuating a sale into a state and you know you’re shipping into that state, that sale is likely going to be counted towards your nexus threshold with that state.

And once you reach that threshold, then you have the obligation to register with the state.

00:01:37
John: And so P.L. 86-272, you mentioned it, I just want to clarify that still is that physical presence of an employee going into that state. That only protects you from income taxes. It didn’t ever protect you from sales tax.

So, we still keep an eye towards that physical presence in the state. We just now have to, in addition, layer on the economic nexus thresholds and examine those.

00:02:05
Sean: All right. So, if you sell services and you’re on the ground in a different state, you have nexus?

00:02:12
John: You have nexus.

00:02:13
Sean: But if you’re selling goods into other states, from a sales tax perspective, we’re only looking at economic nexus now, right?

00:02:19
John: Likely, yes. As long as we don’t have property inventory, those are other nexus creating activities.

00:02:24
Sean: Right. But I mean, if we’re just here in Texas again, and we’re shipping stuff all over the country. We’ve got to worry about the economic nexus thresholds for sales tax purposes.

00:02:33
John: That’s correct.

00:02:34
Sean: But for income tax purposes, we still have some protections under P.L. 86-272. We just can’t be stepping foot in the state, right?

00:02:42
John: To a limited extent, yes. States have been cracking down on P.L. 86-272 applications, and they take a very aggressive approach to nexus creating activities outside of selling tangible personal property.

If you’re offering any sort of on-site services that goes beyond or above just the sale of tangible personal property, you could lose P.L. 86-272 protection.

00:03:08
John: And so P.L. 86-272 protection is something that, in diligence, when we know you have employees going in, we’re going to ask several more questions in regard to what is each employee allowed to do within the state.

And if they’re allowed to do any of those nexus creating activities, we’re going to assume nexus in that state.

00:03:29
Sean: So, we’ve been living in this economic nexus world for the last five or six years ever since the case came out, but it’s something for sellers to worry about.

Are you paying attention to economic nexus versus the age-old rules, right?

00:03:40
John: That’s right. And because the economic nexus is layered on top, all of the same rules around physical presence still apply.

But then if we determine that you’ve stayed away from all of the nexus creating activities, we just look at those thresholds. And the thresholds vary. So just because you have an annual number that goes over the threshold, you then have to go look at the state.

00:04:02
John: Maybe the state only includes retail sales as opposed to wholesale sales. Maybe the state only includes taxable sales in their definition of nexus-creating sales. So, it’s not the end of the story knowing that you’ve gone over this threshold.

00:04:18
Sean: All right. Last question for you then. If you got $100,000 in sales, you mentioned that as a threshold.

So, you got $200,000 in year one and then $50,000 in year two. Am I exempt in year two? Or once I’ve established the filing threshold, then I’m stuck?

00:04:30
John: Once you have that filing threshold and you have the obligation, then you certainly have to comply with those periods because sales tax runs on a period-by-period basis. Otherwise, those statutes stay open.

So then you have to check for trailing nexus rules. And what are your obligations if you drop back down below? Do you need to close out with the Department of Revenue and say we no longer have a threshold there?

00:04:57
Sean: And I was going to save my last question, but normally, I have one more question for you. So, you know, is three to four years.

00:05:04
John: Yes.

00:05:04
Sean: But if we’ve never filed in this state, statute never starts, right?

00:05:08
John: That’s correct. It just stays open.

00:05:10
Sean: All right. Well, I appreciate it, John. Thanks so much.

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