Economic nexus and the future of sales tax
Now that the Supreme Court has ruled in favor of South Dakota, the big question asked by many remote sellers is "What does this mean for my business?" We tapped our resident tax policy experts to help answer commonly asked questions.
Read their answers below or watch the on-demand Q&A forum:
Frequently asked questions
The state of South Dakota petitioned the Supreme Court to overturn a long-standing rule that a company must have “physical presence” inside of a state before the state has the legal authority to require it to collect and remit sales tax. South Dakota was successful in convincing the court to expand its authority to impose tax obligations on remote sellers via its economic nexus rule.
Economic nexus is a tax collection obligation imposed on companies that have a certain level of economic activity within a state. Unlike nexus that’s based on physical presence, economic nexus is based entirely on sales revenue, transaction volume, or a combination of both. Like many sales tax laws, economic nexus criteria vary by state, but all aim to level the playing field between non-collecting out-of-state sellers and brick-and-mortar businesses.
To trigger economic nexus in South Dakota, an out-of-state seller must meet either of the following criteria in the previous or current calendar year:
(1) the seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000, or
(2) The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.
The state believes a company with $100,000 in South Dakota sales is the equivalent to $30 million in sales nationwide. However, it’s important to look at the law’s exact requirements and your business transactions in South Dakota to see if/how this could affect you.
South Dakota’s economic nexus law applies to remote sellers (online and off-line) that are not currently registered with the state and meet the threshold requirements, which are annual sales in excess of $100,000 or 200 sales into the state.
South Dakota’s law applies to taxable sales made to consumers.
• It does not change what is tax exempt
• It will apply to service providers (not just tangible personal property) as South Dakota taxes lots of services
• It will apply to manufacturers and wholesalers who sell direct to consumers
This ruling should not affect any company already registered and collecting in South Dakota.
TBD. South Dakota has not published or explicitly stated when their law will go into effect.
There are several other states with economic nexus rules similar to South Dakota. These include: AL, CT, GA, HI, IA, IL, IN, KY, LA, MA, ME, MS, ND, OH, PA, RI, TN, VT, WA, and WY. Each has different statutory start dates and sales/transactions requirements that trigger nexus.
Yes. The SCOTUS ruling adds economic nexus to the existing list of activities that create nexus and does not impact any other state nexus laws. Nexus is still enforced when companies have substantial physical presence in another state. For more on nexus, go here.
We recommend that you work directly with a State and Local Tax (SALT) CPA advisor who can counsel you on nexus-related requirements and laws. We have an extensive partner referral program with tax experts and SALT CPAs who would be happy to work with you and provide nexus studies. Here is a list of our CPA partners.
You can also work directly with Avalara’s Tax Advisory Services for a nexus study or other related tax compliance engagements. Contact us at 877-759-6520.
Our resource page on Avalara.com covers South Dakota v. Wayfair, Inc. extensively. It has detailed information and links to other resources by tax policy experts, media reports, and our blog. You can find it here.
Avalara can help you
This guide does not offer a substitute for professional legal tax advice. We recommend that you work directly with a SALT CPA tax advisor who can counsel you on nexus related requirements and laws. We have an extensive partner referral program with tax experts and SALT CPAs who would be happy to work with you and provide nexus studies. Click on the button below for a list of our CPA partners.
Sales tax expert directory