Because it’s burdensome for small businesses.
After the Supreme Court allowed South Dakota’s economic nexus law to stand, many states modeled their economic nexus law on South Dakota’s law. Rather than question the transaction threshold, the Wayfair opinion states “this quantity of business [$100,000 in sales or 200 separate transactions] could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.”
But that was in 2018; there have been growing concerns about the transaction threshold since then.
The Senate Committee on Finance held a hearing in June of 2022 to examine the impact of Wayfair on small businesses. In written testimony to the committee, Diane L. Yetter, president and founder of the Sales Tax Institute, described the “most onerous” threshold as “the test used by South Dakota and evaluated by the U.S. Supreme Court of $100,000 in sales or 200 transactions.”
Yetter explained that a number of her clients whose annual sales in a state were under $50,000 “were required to register solely by exceeding the 200-transaction threshold.” She praised the states that had “recognized the undue burden of the 200-transaction threshold and removed this test” and called for the elimination of remaining transaction count thresholds.
The U.S. Government Accountability Office (GAO) takes a similar stance, noting that transaction thresholds tend to have an outsized impact on small businesses. “A business selling a product at $5 each into a state with a 200 transaction threshold may exceed that threshold with only $1,000 in goods sold,” it observed in a remote sales tax study released in November of 2022.
Even the Streamlined Sales Tax (SST) Governing Board, a remote sales tax pioneer, sees a benefit to removing transaction thresholds. The SST State and Local Advisory Council now says it’s best practice for states to “not have a transactional economic nexus threshold.”
It seems at least some states agree.
Eliminating a transaction threshold shouldn’t hurt a state’s bottom line
States could be forgiven for wanting to maintain a transaction threshold if eliminating it would significantly cut into sales tax collections. Yet when Wisconsin was looking to cut its 200-transaction threshold in 2021, it determined doing so would “have a minimal fiscal effect.”
When Louisiana broached the idea of cutting its transaction threshold with HB171, the Louisiana Remote Sellers Commission was “not clear how this bill might impact sales tax collections.” It will be interesting to see whether Louisiana is able to determine the fiscal effect of eliminating the transaction threshold after it’s gone.
