Why you’re no longer in control of sales tax nexus

Update 9.30.19: The Kansas Attorney General has determined Department of Revenue Notice 19-04 is "of no legal force or effect"; failure to include safe harbor for small sellers is "inconsistent with Wayfair." See Attorney General Opinion 2019-8 for more details.

Until the Supreme Court of the United States issued its seminal sales tax ruling in South Dakota v. Wayfair, Inc., you needed to have a physical tie to a state to establish nexus — the connection that enables a state to tax a business. As a result, you could largely control where you had nexus.

Those days are gone.

The June 21, 2018, Wayfair decision overruled the physical presence rule. Although physical presence nexus still exists, sales tax nexus can now be established solely through economic ties to a state, or economic nexus. Unfortunately for businesses, it’s more difficult to control where you establish economic nexus; you simply can’t force all your customers to live in your home state, or in the states where you already collect tax, especially if you sell online.

When physical presence was the only way to establish a sales tax obligation, it was possible to manage nexus by limiting your physical footprint through a variety of means, such as:

• Avoid making deliveries into other states
• Avoid traveling across state lines for business
• Avoid storing inventory for sale in other states  
• Have only in-state business affiliates, contractors, and employees

Such restrictions would be limiting and require vigilance, certainly. However, before the Wayfair decision, it was possible to abide by them while having customers in other states.

You have much less control of your nexus footprint under economic nexus laws — at least if you’re in the business of selling stuff (and even services, in some states). Every business needs customers, and increasingly, customers live in states that require remote sellers to collect sales tax. That’s why the Wayfair decision was such a game changer.

Most state economic nexus laws provide an exception for small sellers, and each state’s economic nexus threshold is unique. Thus, you need $500,000 in retail sales of tangible personal property into California in a calendar year to trigger economic nexus with the Golden State, but just over $100,000 in cumulative gross receipts or annual gross retail sales in Washington.

New York measures sales and transactions: A large sale to one customer could meet the sales threshold, but you won’t establish economic nexus until you also make more than 100 transactions in the state. However, economic nexus in many states is established by sales or transactions, or by sales alone (as in California and Washington). Furthermore, making just one sales transaction in Kansas could establish a sales tax collection requirement for a remote seller come October 1, 2019, according to Kansas Department of Revenue Notice 19-04.

In other words, depending on what you sell, where you sell it, and who you sell it to, one sale could be enough to put you over a state’s economic nexus threshold. That can be true for manufacturers and wholesalers as well as retailers, as some states include exempt sales in their threshold count.

In the wake of Wayfair, you need to monitor your sales into all states with economic nexus — and that’s almost all states. Of the 45 states* (plus the District of Columbia) that have a general sales tax, 43 have an economic nexus law or rule.

When a new sales tax collection obligation is created, you must be ready to register with the state tax authority and commence sales tax collection and remittance. Some states (e.g., New York) expect you to register as soon as the economic nexus threshold is crossed. Others, like Washington, give you a bit of time to line up your ducks.

The alternative to registering for sales tax hardly bears considering. To rule out economic nexus entirely, you’d need to refuse to have customers in 43 states and Washington, D.C.

Economic nexus is dramatically altering sales tax obligations for businesses of all sizes in all industries. To successfully navigate it — and comply with new collection and reporting requirements — you need information. Details about each state’s economic nexus law is available in this state-by-state guide to economic nexus laws. And if you’re an Avalara AvaTax customer, make sure to check the economic nexus tracker within the product; we’ll alert you if it looks like you’re approaching or have exceeded an economic nexus threshold.

*Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.