Your Nexus Queries Answered: Unraveling the Top 3 Areas of Confusion

Ever since the Supreme Court released its decision in South Dakota v. Wayfair five years ago, we have been flooded with questions about economic nexus legislation and how it affects businesses across the country. Now that every state has added economic nexus legislation, every business must ask these questions!

Many of the questions we receive focus on the details of South Dakota’s economic nexus legislation, as upheld by the Supreme Court, and how each state interprets it. For reference, as you work through this article, this is what the legislation said at the time it was enacted and addressed in the case:

A retailer would be presumed to be liable for the collection of sales and use tax in South Dakota, even if the seller does not have a physical presence in state, if the seller meets either of the following criteria in the previous or current calendar year:

• The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000; or
• The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.

1. Gauging Thresholds: When do I meet the threshold?

Companies across the board struggle to figure out if they are crossing thresholds in each state. There are factors such as…

• Are gross, retail, or taxable sales included? What counts as a taxable transaction?

• What date range should I consider?
• Is it transaction count and/or dollar amounts?

Our most common answer to any sales tax question is, it depends. It’s not worth memorizing the requirements and qualifications that each state imposes on sellers. Luckily, we have a free chart where you can find the details about economic nexus for each state. However, that’s just the first step in your process! Let’s get into it…

Is the transaction threshold taxable transactions or total transactions?

Most states say their thresholds are “gross” which means all sales, including sales for resale, taxable, and exempt sales. However, some states say they only include “retail” sales toward their economic nexus thresholds, which would indicate that the threshold includes all sales other than sales for resale – this would include exempt sales other than resale. A “taxable” sales standard excludes any nontaxable sales regardless of the reason. Check out the “Includable Sales” column of our Economic Nexus State Guide.

To what time period is the economic threshold applied – per year, per quarter?

The threshold is per year which could be a calendar year, a fiscal year or a rolling 12 month or 4 quarters. Most states say that you should evaluate your collection obligation if you exceed the threshold in the current or prior year. Some states have a quarterly evaluation with a rolling 12-month lookback. It isn’t always clear when the liability begins. A few states have clarified this including Illinois, Missouri, and Vermont. Check out the “Measurement Date” column of our Economic Nexus State Guide.

Is it AND or OR for the $100,000/200 transactions economic nexus thresholds?

In all states except Connecticut ($100,000 and 200 transactions) and New York ($500,000 and 100 transactions) it is an ‘OR’ test. A few states including Massachusetts and Minnesota have revised their standard to an ‘OR’ test while others excluded or dropped the transactions threshold entirely.

Effective August 1, 2023, Louisiana will no longer have 200 transactions as part of the state’s economic nexus threshold. The legislation also changes the state’s economic nexus dollar threshold for marketplace facilitators from $100,000 in gross sales to $100,000 in retail sales, removing wholesale and resale transactions from the marketplace facilitator threshold calculation.

This change follows the trend of states removing their 200-transaction threshold, including South Dakota, the state that first enacted the threshold, which passed legislation to drop their transaction threshold earlier this year. This is potentially good news for smaller remote sellers making sales into Louisiana or South Dakota whose sales don’t exceed $100,000 in a calendar year but whose transaction count exceeds 200. This follows similar developments in other states that have removed the transaction count from their economic nexus thresholds, such as Colorado, Iowa, Washington, Wisconsin, and more.

This is great news and follows the Senate Finance Committee Testimony given by Diane Yetter, Founder of the Sales Tax Institute in June 2022.  In her testimony, she explained the compliance burden the 200-transaction threshold puts on the smallest of sellers.  It was based on this testimony in part that led the Streamlined Sales Tax Governing Board to encourage all the member states that still use the 200-transaction threshold to remove it.  South Dakota is taking a leadership role in this effort, and we hope all the other states, not just the SST member states, follow suit and eliminate this burden.

2. Once You Cross the Threshold: What Is Expected?

Once businesses determine that they’ve crossed the threshold, they must figure out what their responsibilities are. Again, it depends. It depends on which states, whether you have physical nexus, and if other taxes are affected.

Once you exceed the threshold, when are you required to register and start collecting?

Each state will have different requirements that will determine when you are required to collect and remit sales tax. In some states it is on the next transaction and in other states there is a transitional period between meeting the threshold and collection of tax. To find this information, check out the “When You Need to Register Once You Exceed the Threshold” column of our Economic Nexus State Guide to find each state’s information about when you need to start collecting.

Does the Wayfair ruling affect traditional nexus?

Traditional nexus established by sufficient physical presence (through the temporary or permanent presence of people or property) isn’t going away. There is certainly an argument that you must have a “substantial” nexus. You should look for any de minimus thresholds that states might have in place to determine whether you have nexus. And key to determining when you need to register is if a company establishes physical nexus, registration and collection must happen on day 1 and there is no economic threshold to be evaluated!

If a company meets the sales tax nexus, is the company subject to the state income or franchise tax?

Public law 86-272 does not allow states to tax out-of-state companies on income made from mere solicitations of orders if the orders are approved and filled from outside the state. This law has not been directly impacted by the Wayfair ruling but it may be under more scrutiny and slated for revision as the economy evolves around technology and e-commerce.

Any company that is subject to sales tax registration and compliance should be diligent in evaluating if any other taxes are relevant to their business.  States like Nevada, Ohio, Oregon, and Washington that have gross receipts taxes all use economic nexus thresholds and these pre-date the Wayfair decision.  Some states have enacted bright-line income tax tests and there is a push by the states with leadership from the MultiState Tax Commission to abolish reliance on Public Law 86-272.  Although sales tax collection carries an administrative burden for the seller, if the tax is correctly collected from the customer, the tax is not a cost to the seller.  However, income tax and gross receipts taxes are a direct cost.  Remote businesses must monitor their activities in a state to determine when either of these taxes could be triggered.

What is Yet to Come?

States continue to fine tune previously passed nexus legislation and rules, especially in light of the interplay between economic nexus, marketplace facilitator rules, and physical nexus.

The U.S. Supreme Court decision in South Dakota v. Wayfair and its lasting impacts are a game changer for essentially any business making sales.  Will the Federal Congress get involved in the economic nexus “game”?  The Government Accounting Office (GAO) in their Remote Sales Tax:  Federal Legislations Could Resolve Some Uncertainties and Improve Overall System report published in November 2022 reinforced the complexity and resulting burdens and builds the case that federal legislation could help We hope that the future brings more simplified rules to make the jobs of sales tax professionals easier.

Five years post-Wayfair and we are still seeing plenty of businesses just poking their heads out of the sand.  It is much harder to make the argument that they didn’t know this applied to them. COVID-19 and the resulting pandemic delayed audits that we expected around the three-year mark. But these audits are starting, and the states are not very forgiving. For any business that is still thinking this doesn’t impact them, harsh reality may come soon through a “love letter” from a state department of revenue. Don’t be the company that gets caught!