Could 2023 bring the end of economic nexus transaction thresholds?
A growing number of states are eliminating the transaction threshold that establishes sales tax nexus for remote sellers, including the state that launched economic nexus: South Dakota.
In 2016, South Dakota enacted an economic nexus law requiring out-of-state businesses to register for sales tax if they had more than $100,000 in gross sales or at least 200 separate transactions in the state in the current or previous calendar year. Lawmakers did this despite the fact that, at the time, states did not have the authority to tax a business with no physical presence in the state.
A legal battle over South Dakota’s law went all the way to the Supreme Court of the United States. The decision in South Dakota v. Wayfair, Inc. (June 21, 2018) repealed the physical presence requirement for sales tax, freeing all states to tax remote sales. (Physical presence in a state continues to be a sales tax nexus trigger.)
Every state with a general sales tax now has an economic nexus law on the books, and many states emulated South Dakota’s remote seller threshold of $100,000 in sales or 200 transactions. But that’s changing. Ten states — including South Dakota as of July 1, 2023 — have cut the 200-transaction threshold from their economic nexus laws.
Transaction thresholds cut in 10 states and counting
As of October 9, 2023, the following states have eliminated their economic nexus transaction threshold:
Other states will likely join this list in 2024.
States with no transaction threshold from the outset
These 13 states never created a transaction threshold in the first place:
Calculating economic nexus thresholds is still complex
Though the needle does seem to be moving toward sales tax simplification for remote sellers, plenty of complexity remains.
Broadly speaking, there are six different categories of economic nexus thresholds:
- $100,000 (19 states)
- $100,000 or 200 transactions (21 states, Puerto Rico, and the District of Columbia)
- $100,000 and 100 transactions (one state)
- $250,000 (two states)
- $500,000 (two states)
- $500,000 and 100 transactions (one state)
Some thresholds include only taxable sales of tangible personal property (TPP); others are based on gross sales, meaning even businesses that only make exempt sales can also establish economic nexus. Thresholds in some states include services in addition to TPP.
Selling through a marketplace adds another layer of complexity, because some thresholds include sales made through a marketplace that collects and remits tax on behalf of the seller, while others don’t.
Finally, states base thresholds on a variety of different time periods:
- The prior or current calendar year
- The prior calendar year
- The preceding 12 months
- The preceding four calendar quarters
- The preceding four sales tax quarters
For businesses, especially businesses selling a variety of products into numerous states, figuring out where and whether nexus exists is a difficult, time-consuming task. Furthermore, businesses must be prepared to start collecting sales tax as soon as they cross an economic nexus threshold, as required in at least 13 states and the District of Columbia.
No wonder sales tax experts (and businesses) are calling for increased simplification and uniformity.
Sales tax experts call for increased uniformity
“The biggest burden on small businesses and remote sellers is lack of uniformity and consistency between all the states,” Diane Yetter, President of Sales Tax Institute, told the United States Senate Committee on Finance on June 14, 2022. “States should make every effort to reduce unnecessary complexity and variations of law that create avoidable burdens on sellers.”
The transaction threshold is particularly burdensome for small businesses, according to Yetter: “A third of our clients with sales under $50,000 in a state in the last year were required to register solely by exceeding the 200-transaction threshold.”
Yetter praised the states that have recognized — and removed — “the undue burden of the 200-transaction threshold,” and she encouraged other states to do the same. “Uniformity of economic thresholds, definitions, and compliance will have the greatest impact on reducing the burdens on small businesses and remote sellers.”
This post has been updated.
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