How small is small? Making sense of economic nexus small seller exceptions – Wacky Tax Wednesday
- Oct 10, 2018 | Gail Cole
Economic nexus imposes a sales and use tax collection obligation on remote sellers based only on their economic activity in a state. Nearly 30 states have adopted economic nexus since the Supreme Court of the United States ruled physical presence in a state is no longer the sole requisite for sales tax collection (South Dakota v. Wayfair, Inc., June 21, 2018), and all provide an exception for small sellers. The problem is, these exceptions are not all the same.
To determine how much business a remote seller is doing in a state, economic nexus laws rely on the volume of sales, the number of transactions, or both. For example, the South Dakota law that led to the demise of the physical presence rule uses the following thresholds: $100,000 in gross sales or 200 or more transactions of property, electronically delivered goods, or services delivered into the state in the current or previous calendar year.
Approximately 20 states with economic nexus share the $100,000 in sales/200 transactions threshold (though not all include the same transactions in the test): Remote sellers that have less than $100,000 in sales or fewer than 200 transactions in the state don’t have to collect and remit sales or use tax in the state. Those with more than $100,000 in sales or at least 200 transactions must.
Seems simple enough, and for a business that sells only in its home state and South Dakota, it probably is. However, it’s less simple for businesses with customers in multiple economic nexus states. And it will become even more complicated when other state economic nexus policies go into effect later this year and in early 2019.
Different small seller exceptions
Though most economic nexus states closely follow South Dakota’s example, several have adopted different thresholds. In Alabama, for example, a remote seller must do more than $250,000 in sales in the state and engage in certain activities (e.g., solicitation) to trigger economic nexus. In Connecticut, the threshold is at least $250,000 in revenue and 200 or more retail sales into the state and systematic solicitation in the state. In Minnesota, the economic nexus threshold is 10 or more sales totaling $100,000 or 100 or more retail sales. And so on.
There are even subtle differences among states with South Dakota–style economic nexus thresholds. A remote seller must have $100,000 or more (or 200 transactions) to trigger economic nexus in Colorado, while in Indiana, a remote seller must have more than $100,000 (or 200 transactions). The likelihood of a business meeting or missing the threshold by mere pennies seems slim, but still, a difference is a difference.
Then there’s West Virginia, one of the latest states to adopt economic nexus. Like most other states, it relies on the $100,000/200 transactions thresholds to determine whether an out-of-state seller has established an obligation to collect and remit West Virginia sales and use tax. Unlike the others, its policy says both $100,000 and 200 transactions and $100,000 or 200 transactions.
West Virginia State Tax Department Administrative Notice 2018-18 states that a tax collection obligation is triggered if either threshold is met during the 2018 calendar year. Each year thereafter, it explains, “The requirement will be imposed for a given calendar year based on the vendor's attainment of either of the stated thresholds in the immediately preceding calendar year” [emphasis mine].
However, the Tax Department website provides conflicting information. It states in its introduction: “This collection requirement does not apply to a remote seller that during calendar year 2018 had gross sales of tangible personal property and/or services for delivery in West Virginia of $100,000 or less and had fewer than 200 sales transactions for delivery in West Virginia” [emphasis mine].
It continues, “When the small seller-exception applies, then in any calendar year when either of these thresholds is met, the seller must begin to collect West Virginia sales and use taxes on sales made after the date either of these thresholds is met” [emphasis mine].
Farther down that page, FAQs 4 (Are all remote sellers required to register in West Virginia?) and 7 (How is the small-seller exception determined?) state that both thresholds must be met to trigger a sales tax collection obligation.
When we sought clarification from the department, we were told that the small-seller exception applies if both thresholds are met during calendar year 2018. However, if a remote seller meets either threshold during calendar year 2019, or any year thereafter, it establishes economic nexus and an obligation to collect and remit West Virginia sales and use tax.
Transactions included in state thresholds
Another complicating factor is that different states include different transactions in the threshold. For example, thresholds in the states below are based on the following:
- Connecticut: retail sales of products
- Maine: taxable and nontaxable products, services, and electronically delivered products
- Mississippi, Nevada, and Vermont: sales into the state
- West Virginia: taxable and nontaxable products and services
Such differences make determining the threshold in multiple states extremely challenging.
States are striving to make their economic nexus laws clear, but these are new laws, and it will likely take time to sort out all the kinks.
Learn more about different state economic nexus laws, and check out Avalara’s state-by-state guide to sales tax economic nexus rules.