Do you really understand economic nexus for sales tax?

Businesses have heard a lot about economic nexus over the past few years. But what exactly is economic nexus – and, more importantly, have you kept up with its constant changes in the sales tax realm?

Sales tax nexus is the connection your business has with a state or local taxing jurisdiction. It can be physical in the form of one of your offices actually being in a state or other tax jurisdiction. It can also be economic in that you have enough sales in a given period to create sales tax nexus in a state or other jurisdiction. 

According to TaxConnex’s recent market survey of 100 top finance professionals, economic nexus and its history over the past four years remain areas of anxiety even into 2022. 

Almost four out of five (78.8%) of those surveyed expect to expand operations that could potentially create economic nexus. Yet most learned about the Wayfair case, the 2018 Supreme Court decision that largely ignited economic sales tax nexus nationwide, only relatively recently. Almost one in every five (18.5%) only learned about the decision less than a year ago or still don’t know much about it. 

Among other findings: 

• Almost a third of respondents are still adjusting their sales tax operations in the wake of Wayfair or are still trying to figure out its impact on their business. 

• Almost half report being confused by the taxability of their own products or services and say it’s hard to keep up with states’ changing nexus rules. 

• More than a quarter say “lack of internal knowledge or expertise” is the major barrier to their financial team managing sales tax for their company. 

There’s obviously a lot to learn. 

The back story 

The modern history of states’ sales tax and economic nexus really began with Wayfair, which empowered tax jurisdictions with the sudden authority to require thousands of companies to collect and remit sales tax into more states. 

The decision stemmed from a South Dakota law of 2016 requiring any out-of-state business to collect sales tax in South Dakota if they had generated more than $100,000 in gross sales or had more than 200 sales into the state within a year. After an objection by Wayfair – and lower court decision in the online sales giant’s favor –the Supreme Court ruled 5 to 4 in favor of South Dakota. 

This decision landed just as e-commerce had begun to explode as a venue for more companies to sell more goods and services to more customers. States soon realized they had a chance to take in potentially billions of dollars in annual revenue and quickly joined South Dakota in mandating that remote sellers collect and remit sales tax. Before the end of 2019, 43 of the 45 states (including D.C.) that had a state-wide sales tax had enacted economic nexus. Today, all 45 states with a statewide sales tax have enacted laws triggering economic nexus, Missouri’s laws do not go into effect until 2023 though.

States generally set economic nexus triggers based on in-state transaction counts, revenue, or both. $100,000 in sales or 200 or more separate transactions tend to be the standard for many states – but thresholds did (and continue to) vary widely. 

Events of 2021 showed how dynamic and confusing the landscape of economic nexus remains in a given year. Illinois began requiring remote sellers with economic nexus and marketplace facilitators to start collecting the Illinois State and Local retailer’s occupation tax.  Louisiana worked to streamline its notoriously confusing sales tax environment; and Kansas set a new economic nexus threshold for companies.  Colorado home-rule jurisdictions jumped on the economic nexus bandwagon as well. 

Those are just a few of the events – and “confused” doesn’t begin to describe online businesses that have to keep up. 

More of the same ahead 

Economic nexus continues to adjust and settle into a state of normalcy. Most recently, Florida and Missouri became the last states with a sales tax to enforce economic nexus. In many states – notably Alaska – local jurisdictions are intensifying enforcement of sales tax nexus through home rule and other new sales tax laws. Now that the pandemic helped them discover just how lucrative sales tax can be, states and jurisdictions are also intensifying sales tax investigations and audits. 

Economic nexus rules aren’t the only thing changing within the sales tax landscape. New taxes are devised all the time. 

• Maryland has greenlighted the nation’s first tax on digital advertisements; the gross receipts tax on digital ads ranges from 2.5% to 10% on advertising businesses with global revenues exceeding $100 million, so long as they have at least $1 million in advertising revenue within Maryland for the calendar year. Though some called the Maryland law “incredibly vague” on vital definitions, other states have been working on similar efforts to add taxes for both this and an expanding number of digital products. 

• Services are increasingly tempting for states looking to levy more sales tax. Though some states are repealing sales taxes on a few services, other states – notably Indiana, Nebraska, Connecticut and perhaps West Virginia – look to expand sales tax by taxing what has historically been an untaxed source of income. 

Economic nexus provides us a bright-line test as to whether a business has established sales tax nexus; however, rather than simplifying sales tax for businesses, it has added an additional layer – recognizing that the physical presence standard is also still in play.  Combined with the changing landscape related to the taxability of certain services, sales tax is becoming more and more complex to manage. 

TaxConnex has assisted companies in many industries alleviate the burden of sales tax. We are experts when it comes to navigating tax regulations. Contact us to learn more about how TaxConnex can take sales tax off your plate entirely.