The lingering effects of last year on economic nexus

Toward the end of every year, businesses start planning for the year ahead. It’s a time to review and adjust long-term goals, evaluate staffing needs, and assess products. This year, businesses also need to consider a new factor: economic nexus.

Economic nexus policies base a sales tax collection obligation on a business’s economic activity in a state. It’s a relatively recent phenomenon: Until June 21, 2018, businesses generally had to have a physical presence in a state before the state could require them to collect and remit sales tax.

In June, the Supreme Court of the United States ruled that a remote seller’s “economic and virtual contacts” with a state could be sufficient to trigger sales tax nexus. The decision in South Dakota v. Wayfair, Inc. represents an enormous change for retail sales tax: In addition to in-state sales, states now have the authority to tax remote sales.

But not all remote sales. The Supreme Court praised South Dakota for allowing an exception for small sellers, and to be prudent, other states are doing the same. To determine which sellers must collect and remit, economic nexus states have developed sales or transactions thresholds. This means non-collecting sellers need to monitor their sales into economic nexus states and be prepared to act quickly once the small-seller threshold has been surpassed.

Economic nexus thresholds: Looking ahead may require looking back

Thresholds vary from state to state, as do most sales tax rules and regulations. Yet many states have modeled their thresholds on the South Dakota law that led to the end of the physical presence rule. In South Dakota, a tax collection obligation is triggered if, in the current or previous calendar year, a remote seller has:

• More than $100,000 in gross sales in the state; or
• 200 or more transactions delivered into the state.

Sales tax applies to most transactions in South Dakota, so sales of products, electronically transferred products, and services are included in its threshold. In some states, the threshold is limited to taxable sales of tangible personal property; in others, it includes taxable or exempt products and services; and other states have different threshold nuances. To determine whether your sales into the state have met the threshold, you need to know which sales the threshold includes.

In addition to knowing which sales are included in the threshold determination, you need to know when to measure qualifying sales into the state. States aren’t only interested in your current sales: In many states, a tax collection obligation is triggered if you surpassed the threshold during the previous year, even if this year’s sales into the state are below the threshold.

The threshold applies to the “previous or current calendar year” in almost 20 states: Colorado, Georgia, Hawaii, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Nevada, New Jersey, North Carolina, North Dakota, Ohio, South Carolina, South Dakota, Utah, Washington, and Wyoming. If you met the threshold in one of these states at the end of 2018, you’ll have to collect and remit that state’s sales tax in 2019.

Other time periods for state economic nexus thresholds include:

• Annual: Nebraska, Wisconsin
• Calendar year: West Virginia
• Consecutive 12-month period: Minnesota
• Previous calendar year: Alabama, Massachusetts, Michigan, and Rhode Island
• Previous 12-month period: Connecticut (ending September 30), Illinois (determined quarterly), Mississippi, Oklahoma, Pennsylvania, Tennessee, and Vermont

Meeting a threshold: When does tax collection start?

Unfortunately, many states haven’t yet provided clear guidelines about how soon a sales tax collection obligation must begin after the threshold has been met. In the few that have, the answer varies.

In Illinois, retailers must determine at the end of each quarter if the threshold was met during the preceding 12-month period. If it was, they must collect taxes on sales to Illinois purchasers starting the first day of the following quarter. For example, if the threshold is determined to have been met on March 31, 2019, collection must commence April 1, 2019.

Retailers have a bit more time to comply in Minnesota: Remote retailers must collect and remit tax on the first taxable retail sale into Minnesota that occurs no later than 60 days after their sales into the state during 12 consecutive months meet the threshold.

In South Dakota, if a remote retailer meets one or both of the thresholds in the previous calendar year, that retailer is required to become licensed and remit South Dakota sales tax for the following year. In other words, if you meet the South Dakota threshold in late December 2018, you’re required to register and collect tax in 2019. This is true even if you don’t end up meeting the threshold in 2019, or if you don’t meet it until late 2019.

However, “if a business meets one or both of the thresholds … during the current calendar year, the business is required to become licensed and remit South Dakota sales tax from that point forward.” In other words, if you meet the threshold in March 2019, you must register with the state as soon as the threshold has been met and start collecting South Dakota sales tax from that point forward.

With states requiring immediate action after a threshold has been met, retailers that sell across state lines need to closely monitor sales in these states, and be prepared to act quickly.

To ensure sales tax compliance in 2019, review your sales and transaction data for 2018. If you met or surpassed the small-seller threshold in one or more states, you’ll likely have new sales tax collection obligations starting January 1.

Avalara’s state-by-state guide to sales tax economic nexus rules can help you determine where you’re at risk for establishing economic nexus.