What happens when states change economic nexus thresholds?
In theory, change is neither good nor bad, it just is. But that’s a bit Pollyannaish when it comes to sales tax because even a small change to sales and use tax law can have a big impact on sales and use tax compliance. Perhaps nowhere is that more evident than with economic nexus thresholds.
Nexus is the connection between a business and a state that enables a state to tax sales. It’s commonly established through physical presence in a state, but after the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. (June 21, 2018), physical presence is no longer essential: An out-of-state business can establish nexus purely through its economic activity in the state, or economic nexus.
Hawaii, Maine, and Vermont began enforcing economic nexus mere days after the Wayfair decision, having had economic laws waiting in the wings. Within a year of the ruling, only three states did not have an economic nexus law on the books: Florida, Kansas, and Missouri. Today, the only state with a general sales tax that doesn’t enforce economic nexus is Missouri, and it will do so starting January 1, 2023.
Safe harbor: A double-edged sword for small businesses
To avoid overtaxing small businesses — and to stave off potential legal challenges — all states eventually followed the example of South Dakota and created an exception for businesses with relatively little economic activity in the state. The line demarking the small-seller exception is commonly referred to as the economic nexus threshold.
Economic nexus thresholds are based on a remote seller’s sales volume (e.g., $100,000 in gross sales in the state) and/or number of transactions (e.g., 200 separate transactions in the state) within a certain period, such as the current or previous calendar year. The particulars, including which sales count toward the threshold, vary by state. You can find state-specific details in our state-by-state guide to economic nexus laws.
The good news is: You aren’t required to register for sales tax in states where your sales remain below the economic nexus threshold, unless of course you establish nexus through physical presence or other means. However, once you cross a state’s economic nexus threshold, you must register and comply with all applicable sales and use tax laws.
Unfortunately, economic nexus thresholds necessitate close monitoring of sales activity since you need to register your business if you cross a threshold — often by the next transaction. So, even if you don’t have nexus, you still have a compliance burden if you sell into states that enforce economic nexus. And that burden is amplified by the fact that states sometimes change their economic nexus thresholds by eliminating the transaction threshold, increasing or reducing the sales threshold, or otherwise.
To date, close to 20 states have altered their economic nexus thresholds in one way or another: Arizona, California, Colorado, Connecticut, Georgia, Iowa, Kansas, Maine, Massachusetts, Minnesota, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, Tennessee, Washington, and Wisconsin.
For example, Colorado, North Dakota, and Washington eliminated their transaction thresholds. Arizona and New York changed their sales thresholds (Arizona’s went down, New York’s went up). Rhode Island added specified digital products to its threshold. And so on.
In some states, such changes are retroactive to the date the economic nexus law first took effect. Other states make the change effective at a later date. Both options come with challenges.
When an economic nexus threshold change is retroactive
When a threshold is changed retroactive to its initial effective date, remote sellers can scrap the original threshold requirements and focus on whether they’ve met the new threshold. However, if the threshold was reduced, remote sellers must ensure they didn’t cross the new threshold in the past.
Few states have made threshold changes retroactive to the effective date of their economic nexus laws. One that has is New York.
The Empire State first announced it would tax remote sales in January 2019, at which time it stated that due to the Wayfair decision, “certain existing provisions in the New York State Tax Law that define a sales tax vendor immediately became effective.” That was as clear as the state got to giving an effective date of June 21, 2018 (the date of the Wayfair ruling). The New York Department of Taxation and Finance provided more clarity when New York changed its sales threshold from $300,000 and 100 transactions to $500,000 and 100 transactions with the enactment of Senate Bill 6615 in June 2019. The change was retroactive to June 21, 2018.
When an economic nexus threshold change isn’t retroactive
There are many examples of states establishing a new effective date when their economic nexus threshold changes, including:
Georgia’s economic nexus threshold was $250,000 from retail sales or 200 transactions from January 1 to December 31, 2019. Effective January 1, 2020, the threshold is $100,000 or 200 transactions.
Iowa’s economic nexus threshold was $100,000 or 200 transactions from January 1 through June 30, 2019, but effective July 1, 2019, Iowa’s transaction threshold is eliminated.
Maine began enforcing economic nexus July 1, 2018, with a threshold of $200,000 sales or 200 transactions. As of January 1, 2022, the transaction threshold in Maine is eliminated.
Other states in this boat include North Carolina, Tennessee, and Wisconsin.
When there are multiple changes and multiple effective dates
Some states have made several changes to their economic nexus thresholds, with different effective dates.
To mimic South Dakota, the California Department of Tax and Fee Administration (CDTFA) set a threshold of more than $100,000 in sales or at least 200 transactions in the state in the current or previous calendar year, effective April 1, 2019. The enactment of Assembly Bill 147 a few weeks later increased the sales threshold to $500,000 and eliminated the transaction threshold retroactive to April 1, 2019. However, a $500,000 threshold for district use tax collection, which applies to both in-state and out-of-state businesses, is effective April 25, 2019. So, that’s a bit confusing.
Washington’s original economic nexus threshold of $100,000 in sales or 200 transactions took effect October 1, 2018, and was based on gross retail sales into the state. Gross retail sales was later changed to cumulative gross receipts into the state retroactive to October 1, 2018. The transaction threshold was then eliminated, effective March 14, 2019; the sales threshold became based on gross annual income of the business attributed to Washington effective January 1, 2020.
Sometimes, whether an old threshold needs to be considered isn’t entirely clear.
Economic nexus first took effect in North Dakota on October 1, 2018, with a threshold of $100,000 in sales or 200 transactions. The enactment of Senate Bill 2191 in March 2019 eliminated the transaction threshold “for taxable years beginning after December 31, 2018.” However, according to the North Dakota Office of State Tax Commissioner, “Remote sellers need to consider only the $100,000 taxable sales threshold in the previous or current calendar year to determine if tax collection is required by statute, as the 200 or more taxable sales transactions into the state in the previous or current calendar year was repealed.” The department also gives this guidance to remote sellers: “North Dakota law includes an exception for small sellers that requires sales tax collection by remote sellers ONLY IF their taxable sales into the state exceed $100,000 in the current or previous calendar year.” So, although the statute has the transaction threshold in effect through December 31, 2018, the department doesn’t seem to consider it.
That’s not always so. Tax authorities tend to follow the letter of the law, so if a threshold was on the books for a certain period, it can be enforced.
Why threshold changes matter
Businesses shouldn’t overlook economic nexus threshold changes for two reasons:
They may require you register
They may allow you to deregister
A new threshold may require you to register
Georgia established an economic nexus threshold of $250,000 in sales or 200 transactions in the previous or current calendar year, effective January 1, 2019. The threshold was reduced to $100,000 in sales or 200 transactions in the previous or current calendar year starting January 1, 2020.
Due to this change, a remote retailer who had $150,000 in sales and 50 transactions in 2019 would not have had economic nexus under the old threshold but would establish economic nexus under the new threshold.
A new threshold may allow you to deregister
Of course, the reverse could also be true: A remote seller that met a state’s transaction threshold but remained beneath its sales threshold could cease to have economic nexus with that state if the transaction threshold is eliminated.
However, it’s important to remember that states have different policies regarding deregistration. While economic nexus doesn’t necessarily last forever, some states may require a remote seller to continue to collect and remit for a certain amount of time after nexus-creating activities have ceased.
Change can cause a lot of work
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