The Economic Nexus Yardstick – How to Measure Thresholds
Remote sellers are faced with many questions about economic nexus such as, how can you determine if a company has reached economic nexus? Are wholesale sales included in the thresholds? Does my business need to register if selling on a marketplace? When is a company required to register for sales tax? In this article, Cherry Bekaert’s sales tax professionals answer these questions to help simplify the process of measuring economic nexus thresholds.
How does a company know if economic nexus thresholds have been reached?
A business can have no physical presence in a state and still have nexus in that state if specific economic thresholds are met. For example, Kansas does not have a sales or transaction threshold while Michigan has a threshold of $100,000 in sales or 200 transactions. California only has a sales threshold of $500,000 and no transaction threshold.
States have varying evaluation periods they use to determine if a seller has reached economic nexus. Most states use the sales figures from the previous and/or current calendar year. Some states, such as Texas, base sales on a rolling 12-month basis, while New York uses the previous four quarters of sales to measure nexus thresholds.
Which sales are included in the thresholds?
Are wholesale sales included in the thresholds? Only retail sales? Total gross sales? Each state has its own regulations regarding this measurement. Alabama and Washington D.C. do not include wholesale sales whereas California and Kansas do. Most states include exempt sales in the threshold calculations but a few states, such as Arkansas and New Mexico, do not include exempt sales.
Are marketplace facilitator sales included in the calculation of economic nexus?
Most states have implemented laws regarding marketplace facilitators. Each state has its own determination if marketplace sales are included in the nexus threshold requirements. For example, Pennsylvania includes wholesale and exempt sales but does not include marketplace sales in their calculations.
When does the state expect a business to register after passing economic nexus?
Most states will allow a company to register the month after passing the threshold. But some states, such as California, require registration immediately after passing the threshold.
The world of sales tax is constantly evolving and changing. In fact, three states (Arizona, California, and Virginia) now include related entity sales in the economic nexus calculations. If a seller has a brick-and-mortar store and an online store that are separate entities, these states count sales in both stores together to reach the economic nexus threshold for each company.
While taking care of your customers and growing your business is a priority, keep in mind that sales tax rules and regulations are constantly changing and staying informed is a good way to help your business continue to be successful.
For more information about economic nexus thresholds or any sales tax issue for eCommerce sellers, visit the Cherry Bekaert website or contact us.