Crash Course in Economic Nexus Thresholds
Understanding thresholds and knowing how to measure them is key to complying with the new economic nexus laws introduced by most states. The job of tracking sales into each state and constantly watching for threshold attainment is extremely daunting for sellers of all sizes. That’s why we have put together this crash course in understanding economic nexus thresholds.
When the Supreme Court ruled in the South Dakota vs Wayfair case in June 2018, economic nexus became the two favorite words for Departments of Revenue across the United States. States now have the right to collect sales tax from out-of-state sellers with no physical presence in the states if they have created an economic presence. This economic nexus is established when remote sellers meet each state’s thresholds for number of transactions in the state and/or sales into the state.
The South Dakota thresholds are $100,000 of in-state sales or 200 separate transactions in the current or preceding calendar year. Most states require sellers to begin collecting and remitting sales tax to the state for all taxable sales as soon as economic nexus thresholds are met. Other states offer grace periods.
States Outside the Threshold Box
To complicate matters, some states are enforcing different thresholds. Here are some examples:
1) States may have higher total gross sales thresholds.
2) Some states are eliminating transaction thresholds and only imposing sales thresholds.
3) A few states require remote sellers to meet both the sales and transaction thresholds.
Other Threshold Factors to Consider
Measurement Time Periods: Many states follow South Dakota’s rule that thresholds are met by the sales and transactions in the current or preceding calendar year. But a handful of states have set up different time frames such as the prior twelve month period.
Collection Start-Up Dates: Most states require sales tax collection to begin immediately when a seller meets the thresholds, thus emphasizing the importance of tracking sales. Other states provide grace periods, but these windows vary greatly, from 30 days to several months after thresholds are met.
How States Define “Total Sales”
Most states measure economic nexus thresholds using total gross sales in the state. Consequently, remote sellers with tax-exempt sales may be required to monitor transactions into these states and register if economic thresholds are met. Then, sales tax returns must be filed. This requirement opens up a whole new sales tax compliance burden for many sellers such as manufacturers.
Complications from Marketplace Facilitator Requirements
A remote seller’s sales tax obligations are further complicated by sales tax collection requirements put on marketplace facilitators by several states. Amazon, Ebay and other marketplace facilitators must collect and remit sales tax for sales made by their third-party sellers in a growing number of states. These laws take the burden of sales tax remittance off the third-party sellers, but only for sales made through these marketplaces. Remote sellers may be obligated to remit sales tax on transactions made directly with customers in these states if economic thresholds are met. Again, the requirements vary by state.
Congratulations! You have completed this crash course in economic nexus thresholds. Keep in mind, the economic nexus landscape is rapidly changing. Only five states do not have statewide sales tax. Of the 45 states with sales tax, the majority are enforcing economic nexus laws, and the rest are at various stages of deciding how and when to address economic nexus.
The first step to complying with the new sales tax obligations is understanding the thresholds for economic nexus. It’s complicated! If you have questions or need guidance, contact Cherry Bekaert to find out how we can help.