On July 2, 2019, Hawaii Gov. David Ige approved Senate Bill 495, enacting an economic income tax nexus standard for businesses without a physical presence in the state. Hawaii is the first state to enact a sales or transaction nexus standard for an income tax based on the economic sales tax nexus thresholds at issue in South Dakota v. Wayfair.
Effective for tax years beginning after Dec. 31, 2019, a person that lacks physical presence in Hawaii is presumed to be systematically and regularly engaging in business in the state if, during the current or preceding calendar year:
- The person engages in 200 or more business transactions with persons within the state
- The sum of the value of the person's gross income attributable to sources in this state equals or exceeds $100,000 or for a person that does business within and without the state the numerator of the person's sales factor for the state equals or exceeds $100,000
For purposes of the Hawaii income tax, a person includes an individual, a trust, estate, partnership, association, company or corporation.
Remote businesses should consider that Public Law 86-272 – the federal safe harbor prohibiting a state from imposing a net income tax on a seller's business activity if it is limited to the solicitation of orders for sales of tangible personal property – may apply. Hawaii’s new income tax nexus standard does not modify those protections.
It is anticipated that other states will follow Hawaii’s lead and adopt similar standards for income tax purposes. Recently, the Texas Comptroller updated its Wayfair FAQ by explaining that the comptroller expects to establish an economic threshold for the franchise tax applicable to returns due on or after Jan. 1, 2020. Locally, Philadelphia adopted a $100,000 economic nexus threshold for the city’s Business Income and Receipts Tax and San Francisco adopted a $500,000 sales threshold for several city taxes including the gross receipts tax – both effective in 2019.
While the $100,000 sales and 200 transaction threshold was the subject of the South Dakota law challenged in Wayfair, the U.S. Supreme Court’s decision did not establish that standard as a constitutional minimum, opening up the possibility that states could utilize lower/different thresholds.
Hawaii’s economic income tax nexus standard now aligns with the economic sales tax nexus standard previously effective July 1, 2018. Since the Wayfair decision, almost all of the states imposing a general sales tax have adopted an economic standard based on sales or transactions.
Taxpayers with questions about Hawaii’s new nexus provisions, the federal safe harbor provided by Public Law 86-272, or how Wayfair may apply to income taxes and other non-sales taxes should consult their tax advisers with questions.