Economic nexus sparks need for speedy sales tax registration
Economic nexus is here. Is your business prepared?
Before the Supreme Court of the United States issued its groundbreaking ruling in South Dakota v. Wayfair, Inc. (June 21, 2018), states could only require a business to collect and remit sales tax if the business had a physical presence in the state. The Wayfair decision overturned the long-standing physical presence rule, freeing states to base a sales tax obligation on a business’s “economic and virtual contacts” with a state. This is known as economic nexus.
Wayfair didn’t eliminate the physical presence rule: You still have a sales tax obligation in states where you have a physical presence. But thanks to Wayfair and subsequent state laws, you can also establish a sales tax obligation (nexus) by making sales in states where you don’t have a physical presence.
Economic nexus laws spread like wildfire after Wayfair. Three states started enforcing economic nexus on July 1, 2018, mere days after the decision, and today, every state with a general sales tax requires remote sellers to register then collect and remit sales tax — as do Puerto Rico, Washington, D.C., and numerous local jurisdictions in Alaska. There’s no statewide sales tax in Alaska, but more than 100 cities and boroughs have local sales tax.
Unfortunately, there’s little uniformity between state economic nexus laws.
Economic nexus laws vary by state
To help minimize the burden of remote sales tax compliance for small businesses, every state provides an exception for businesses whose sales are under a certain threshold. This would be a time-saver if all state thresholds were the same, but they’re not. Every state’s economic nexus law is unique.
Every state has a distinct sales and/or transaction threshold
Some economic nexus thresholds are based on sales volume: $100,000, $250,000, or $500,000 in sales during a certain period of time.
Some thresholds for remote sellers are based on sales volume or transaction volume: $100,000 or 100 transactions.
And some thresholds for out-of-state sellers are based on sales volume and transaction volume: $100,000 and 200 transactions; $500,000 and 100 transactions.
Every state counts different transactions toward their economic nexus threshold
In order to determine whether you’ve met or exceeded an economic nexus threshold, you need to know which transactions count toward the threshold.
Some states include only retail sales of tangible personal property in their economic nexus thresholds. Other states include all transactions, including services and exempt sales. Some states count sales made through a marketplace in their economic nexus threshold, even if the marketplace collects and remits sales tax on your behalf; others don’t. And so on.
Every state has a particular economic nexus evaluation period
You also need to know the evaluation period for the threshold. Here, too, there’s no uniformity. While many states base their economic nexus threshold on the current or previous calendar year, some use a different time frame, such as the preceding 12-month period, determined quarterly.
To top it off, states periodically change their economic nexus thresholds. For example, several states have eliminated the transaction threshold, and at least one (South Dakota) is looking to do the same in 2023.
So, keeping track of economic nexus laws and monitoring where you’re approaching a threshold is a big job. And it’s an important job, because once nexus has been established, you may need to act fast.
Economic nexus can be established overnight
Astonishingly, numerous states require businesses to register with the tax department and start collecting sales tax as soon as they meet the economic nexus threshold — as in, by the very next transaction. These include Arkansas, the District of Columbia, Georgia, Indiana, Kansas, Mississippi, North Carolina, Puerto Rico, South Dakota, Wisconsin, and Wyoming.
Florida, Idaho, Utah, Virginia, and West Virginia are among the states that don’t specify when you need to start collecting sales tax. If in doubt, it may be best to register for a sales tax permit and collect tax on the next transaction. States won’t penalize you for obtaining a sales tax permit a bit early, but they could nail you for delaying your registration.
As for the remaining states, it depends. The California Department of Tax and Fee Administration says remote sellers must register the day they exceed the state’s $500,000 threshold. Per the Ohio Department of Taxation, an out-of-state seller that exceeds the $100,000 threshold on October 15, for example, must register for a seller’s use tax license and begin collecting sales tax from Ohio customers on October 16.
Maine requires a remote seller to register on or before the first day of the first month that begins at least 30 days after the remote seller exceeds the economic nexus threshold. Got that?
Michigan gives remote sellers until January 1 following the calendar year in which they exceeded the economic nexus threshold to register.
South Carolina requires a remote seller to register for a sales tax permit by the first day of the second calendar month after establishing economic nexus.
In Illinois, remote sellers must determine whether they’ve established economic nexus on a quarterly basis. If an out-of-state seller realizes at the end of June that their sales during the preceding 12-month period exceeded the economic nexus threshold, they must register and collect and remit sales tax starting July 1.
Registering for sales tax in a new state
If you don’t collect and remit as required by law, you may end up owing back taxes plus penalties and interest once the state catches on.
But before you can collect and remit tax in a state where you’ve developed economic nexus — or any type of sales tax nexus, for that matter — you must first obtain a sales tax permit (also called a seller’s permit, vendor’s license, etc.).
And before you register to collect and remit sales tax in a state, you should consider whether you have any prior tax exposure with that state. If you do, you may want to look into entering a voluntary disclosure agreement (VDA) with the state. VDA programs can help reduce your back sales tax liability. Many states offer VDA programs on an ongoing basis. The Alaska Remote Seller Sales Tax Commission began offering a voluntary disclosure program on January 1, 2023.
It takes time to discover where you have sales tax nexus and then register as required. Some businesses have the resources to handle the task from start to finish; others need help. Learn more at our Sales Tax Nexus Guide and Sales Tax Registration FAQ.
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