3 things to remember about economic nexus

This June marked 4 years since the landmark Supreme Court decision that launched economic nexus, South Dakota v. Wayfair, Inc et al, but many businesses are still trying to figure out how to manage sales tax obligations brought on by this decision.  The following is a list of 3 things you need to know to get started in understanding your economic nexus footprint.

1. State thresholds are not all the same 

The provisions of South Dakota vs. Wayfair allowed the state to force out-of-state sellers to collect sales tax provided they had at least $100,000 in gross revenue or has at least 200-transactions sourced into the state. Many states followed suit with the same thresholds, but others have adjusted theirs to different revenue or transaction counts.   Some examples:

• Iowa: Gross sales to the state over $100,000; no annual transaction threshold  
• Mississippi: $250,000 sales; no transaction threshold  
• New York: $500,000 sales AND 100 transactions

All 45 states with state-wide sales tax now have economic thresholds set. Some have both revenue and transaction counts, some only revenue. States determine their own thresholds so it is not as simple as knowing one is knowing all. It is important to understand the thresholds for each state in which you have sales. 

2. Some states determine their thresholds by gross receipts, others by taxable sales

When tracking your sales into a state to see if you have met their thresholds you need to ask yourself if you are tracking gross sales or taxable sales. The answer, as it is with most things with sales tax, it depends…

Taxable sales exclude sales for resale or otherwise exempt transactions as well as non-taxable transactions. Exemptions are transactions that are generally taxable, but exempt for a certain reason such as resale, or purchase by an entity not subject to sales tax. Whereas exclusions or non-taxable transactions are not referenced anywhere in statute and are thus “excluded”.

The majority of states use your gross sales, which includes those exempted or excluded sales, when determining economic thresholds. As with revenue and transaction counts, it’s important to understand how revenue is calculated for each state in which you make sales. 

3. Economic nexus doesn’t replace physical presence, it is in addition to physical presence rules.  

Having an office, employee or inventory stored are forms of physical presence, which create nexus for a business. The Wayfair case did not do away with physical presence creating nexus, it instead added economic thresholds to it. You can have either a physical presence or reach economic nexus thresholds into a state to create a sales tax obligation, you do not need both.

Understanding your sales tax obligations and remaining compliant can be quite complex. If you’re looking for help determining your nexus footprint, understanding taxability of your products and/or services, or just want to get sales tax completely off your plate, it may be time to reach out to a sales tax expert. TaxConnex provides outsourced sales tax services to businesses of all sizes. Get in touch to learn how we can help you stay ahead of sales tax and ensure your business remains compliant! 

If looking to learn more about economic nexus, download our new eBOOK – The Complete Guide to Economic Nexus