Every state (pending Missouri’s effective date of 1/1/23) with a sales tax has economic nexus requirements for remote out-of-state sellers following the 2018 South Dakota v. Wayfair decision. Economic nexus generally requires out-of-state sellers to register and collect and remit sales tax once they meet a set level of sales or number of transactions within a state.
Here’s the thing…
To comply with each state’s economic nexus rules, you must stay aware of changes in your business and changes in state legislation and policies, and both are in constant flux.
Even if you registered in a flurry of states post-Wayfair, the story doesn’t end there. Sales tax compliance is a marathon throughout the entire life of a business, not a sprint. To help keep your business processes up to date, here are three things you should be monitoring for economic nexus right now.
You need to have mechanisms in place to monitor your sales volume into each state where you make sales. You must be aware of how your company’s sales compare with state economic nexus thresholds so you can take swift action to register if needed. In many states, the turnaround time in which they expect you to register is as soon as the next transaction after you exceed a threshold.
Visit our Economic Nexus State by State Chart to find each state’s economic thresholds and when you are required to register once you exceed a threshold.
What happens if you’re already registered with a state due to economic nexus and you drop below the threshold? Do you have to stay registered?
To make the determination, you’ll take a close look at the state’s “measurement period” for economic nexus. Most state rules say that a remote seller must register if they exceed the economic threshold in the “previous or current calendar year”. This means you have a two-year period to examine your sales level. If your previous calendar year sales exceeded the threshold but this year’s sales have not exceeded the threshold, you cannot de-register (yet). Dropping below the threshold does not always mean you can cancel your registration.
Several states have more detailed and specific measurement period rules to watch out for, these are also listed on our Economic Nexus State by State Chart.
If you determine that you can de-register based on the state’s measurement period, there are a few important implications to consider. Externally, you should think about the impact halting tax collection would have on your customers. Internally, you need to evaluate the quality and speed of your sales volume tracking mechanisms, because as mentioned, you must be ready to re-register quickly. Another internal consideration is recognizing the time and effort your company spent to register and set up the state in your tax collection system. If you shut it off, will it actually be a significant savings?
Any time your company debuts a new product or service, starts selling on a new channel, or begins selling to a new type of customer, it’s critical to identify sales tax implications from the outset.
For a new product or service, the first consideration is how the states will classify it for tax purposes. You’ll need to know the details of the product and how it is being represented in documents like invoices and contracts. Depending on whether the product or service is taxable or exempt (including as a sale for resale), you may or may not include its sales towards your economic nexus threshold calculation. Check out the “includable sales” column of our Economic Nexus State by State Chart for which types of sales states include towards their thresholds (gross vs. retail vs. taxable sales). If the new product or service is expected to be a big hit seller, you’ll need to closely monitor your sales levels.
Remember, if the new product or service creates physical presence for you in a state such as through a new sample room, a new warehouse, or a new on-the-ground salesperson or employee, the economic nexus thresholds are irrelevant.
For a new sales channel, your company may decide to sell on its own website or on a marketplace like Amazon or eBay. If this new channel causes you to have a mix of sale types—both direct sales and marketplace sales—you need to look at each state’s requirement for including or excluding marketplace sales from the economic nexus calculation. Most states include marketplace sales towards their economic nexus threshold. In these states, you would evaluate whether your combination of direct and marketplace sales pushes you over an economic nexus threshold.
If your company decides to make 100% of its sales on marketplaces, you may or may not have sales tax registration or collection requirements, but it all depends on the state. In several states, if you are a 100% marketplace seller that doesn’t make any direct sales to customers, you are not required to register with the state or file returns even if you exceed the economic nexus threshold.
For selling to new customer types, if your business previously made B2C sales and you’re now making B2B sales, the chances are good that you’re making sales for resale and will need to collect exemption certificates instead of collecting sales tax. You’ll also need to evaluate whether sales for resale are included towards the economic nexus threshold in the states you’re selling into. For example, Colorado includes retail sales for economic nexus. By definition, retail sales do not include sales for resale.
As anyone working in sales tax knows, sales tax laws and rules are not stagnant. You must constantly monitor the states for new legislation and for changes in state policy positions for economic nexus.
Numerous states have tweaked their economic nexus thresholds since the Wayfair decision was issued. We’ve seen states raise and lower their dollar thresholds as well as remove and add number of transactions thresholds. In these cases, you need to know when the rule change is effective. For example, Iowa enacted legislation that removed its 200 transactions threshold and kept its $100,000 sales threshold the same, effective July 1, 2019. Iowa’s economic nexus legislation became effective January 1, 2019, so for January to July 2019 period, the 200 transactions threshold would apply. The latest state to make a change was Maine when it dropped its 200 transaction threshold as of January 1, 2022.
States often announce policy changes on their department of revenue websites or send taxpayers alerts via email. However, states also work with multistate organizations to share information. In 2021, the Streamlined Sales Tax Governing Board released an updated version of its tax administration practices documents that includes sales tax rule information provided by its 24 member states. This update included Disclosed Practice 8, which provides guidance to assist remote sellers and marketplace facilitators in determining their sales and use tax registration, collection, and remittance responsibilities in each of the member states. Disclosed Practice 8 shared some critical updates not previously found on state websites or in state legislation.
We may continue to see new state legislation here and there to refine economic nexus rules. At the federal level, a lot of legislation has failed, but economic nexus and remote seller issues are still on the minds of legislators! In fact, the Sales Tax Institute’s president, Diane Yetter, just testified before the U.S. Senate Finance Committee for its “Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales” hearing.
Economic nexus management requires constant attention. You must monitor changes in your sales volume so you can evaluate whether or not de-registering with a state is a good move for your company. You must stay attuned to exciting initiatives in your company like new product lines so you can evaluate the impact on your economic nexus across the states before a big rollout. Conducting regular research in state legislation and policy changes is also essential to maintaining the health of your economic nexus “profile”.
Failure to keep up with how changes in your business or state rules impact your nexus obligations opens you up to a lot more risk should an audit come down. This is nothing to sneeze at, especially since the Wayfair decision has shifted the focus of state audits to have a greater focus on enforcement of economic nexus.