In the realm of state taxation in the United States, the concept of economic nexus has become increasingly pivotal, particularly concerning sales tax. Economic nexus dictates that a business’s tax obligations within a specific state are determined not solely by its physical presence but also by its economic activity within that state. This shift has significantly altered the landscape of state taxation, particularly in the era of e-commerce and digital transactions.
What is Economic Nexus and Why Do We Have It?
Economic nexus rules were significantly influenced by the landmark 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. This ruling upheld South Dakota’s economic nexus law, allowing states to establish similar rules for income & sales tax collection. Prior to this decision, the requirement for a business to be liable for income & sales tax in a state typically depended on its physical presence within that state, as established in the 1992 Quill v. North Dakota case. However, the Wayfair decision eliminated the physical presence requirement, enabling states to capture income & sales tax revenue from businesses with significant sales activities within their borders, even if those businesses lack a brick-and-mortar presence in the state.
The primary purpose of economic nexus is to ensure that businesses conducting substantial sales activities within a state contribute their fair share of income & sales tax revenue to support local and state services. With the rise of e-commerce and remote businesses, economic nexus has become a vital tool for states to adapt their tax systems to the evolving business landscape and prevent revenue loss.
What You Need to Know About Economic Nexus
Understanding economic nexus is crucial for businesses engaged in interstate commerce. Key points to consider include:
- Thresholds: Economic nexus rules typically involve specific thresholds related to a business’s sales activity within a state. These thresholds may include a minimum level of sales revenue generated within the state, a certain number of transactions with in-state customers, or a combination of both.
- Registration and Compliance: Once a business surpasses the established thresholds in a state, it becomes obligated to register with the state’s tax authorities, collect and remit sales tax on taxable transactions, and adhere to the state’s tax regulations. Compliance with economic nexus rules is essential to avoid penalties and legal consequences.
- State Variations: Economic nexus rules vary by state, with each state having its own thresholds, effective dates, and registration requirements. It’s crucial for businesses to familiarize themselves with the specific economic nexus policies of each state where they conduct business to ensure compliance.
State-By-State Guide to Economic Nexus Policies
Alabama
- Effective Date: October 1, 2018
- Threshold: $250,000 in retail sales within a single year.
- Considerations: Include combined retail sales of tangible personal property delivered within Alabama and sales facilitated by a non-tax-collecting marketplace.
- Marketplace Facilitator Exclusion: Sales conducted through registered marketplace facilitators should not be factored into the economic nexus calculation.
Alaska
- Sales Tax: No statewide sales tax; local municipalities may impose their own taxes.
- Local Tax Requirements: Be aware of any local tax requirements imposed by municipalities.
- Considerations: Nome, Alaska, has its economic nexus ordinance, requiring registration at $100,000 in total sales or over 200 transactions within the city.
- Marketplace Facilitator Exclusion: Transactions through registered marketplace facilitators may still be subject to local tax requirements.
Arizona
- Effective Date: October 1, 2019
- Threshold: $100,000 in annual gross sales.
- Considerations: Factor in all transactions, excluding those through registered marketplace facilitators.
- Marketplace Facilitator Exclusion: Transactions through marketplace facilitators registered for sales tax collection within the state are excluded from the economic nexus calculation.
Arkansas
- Effective Date: July 1, 2019
- Threshold: $100,000 in taxable sales or 200 transactions within a year.
- Considerations: Includes taxable services, digital products, and sales of tangible personal property.
- Marketplace Facilitator Exclusion: Transactions through registered marketplace facilitators and sales of exempt tangible personal property and services are excluded from the economic nexus determination.
California
- Effective Date: April 1, 2019
- Threshold: $500,000 in combined gross sales into the state.
- Considerations: Varying local sales tax rates; be aware of local tax regulations.
- Marketplace Facilitator Exclusion: Sales processed through marketplace facilitators registered for sales tax collection within the state may not be included in the economic nexus calculation.
Colorado
- Effective Date: June 1, 2019
- Threshold: $100,000 in retail sales within a calendar year.
- Considerations: Total receipts from the retail sale of tangible personal property are considered for economic nexus determination.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Connecticut
- Effective Date: December 1, 2018
- Threshold: $100,000 in gross sales and 200 transactions within a year.
- Considerations: Gross receipts from the sale of tangible personal property, all services (taxable or exempt), and sales conducted through online marketplaces are included.
- Marketplace Facilitator Exclusion: Sales intended for resale are the only excluded transactions.
Delaware
- Sales Tax: No state-level sales tax; local jurisdictions may impose their own taxes.
- Regulatory Compliance: Focus on franchise tax and annual report requirements.
- Considerations: Be aware of local taxes imposed by jurisdictions within Delaware.
Florida
- Effective Date: July 1, 2021
- Threshold: $100,000 in taxable remote sales annually.
- Considerations: Only taxable sales of tangible personal property physically delivered within the state are included in the economic nexus criteria.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Georgia
- Effective Date: January 1, 2019
- Threshold: $100,000 in retail sales or 200 retail transactions in a year.
- Considerations: Gross revenue generated from retail sales is considered for economic nexus determination.
- Marketplace Facilitator Exclusion: Excludes non-retail sales of tangible personal property and a significant portion of service transactions from consideration.
Hawaii
- Effective Date: July 1, 2018
- Threshold: $100,000 in gross sales or 200 annual transactions.
- Considerations: Includes various transactions such as intangible property, gross income from tangible personal property, exempt sales, and services.
- Marketplace Facilitator Exclusion: Transactions related to exempt services are excluded from economic nexus determination.
Idaho
- Effective Date: June 1, 2019
- Threshold: $100,000 in annual gross sales.
- Considerations: Considers gross receipts from the sales of products and services, exempt sales, and exempt services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Illinois
- Effective Date: October 1, 2018
- Threshold: 200 or more annual transactions or $100,000 in gross sales within the state over the past 12 months.
- Considerations: Takes into account cumulative sales receipts, exempt sales, and excludes transactions such as sales processed through a marketplace facilitator.
- Marketplace Facilitator Exclusion: Sales for resale, services, and occasional sales are excluded from economic nexus determination.
Indiana
- Effective Date: October 1, 2018
- Threshold: $100,000 in gross sales.
- Considerations: Encompasses gross sales revenue from tangible personal property, electronically delivered products, sales intended for resale, taxable and exempt services, and exempt sales.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Iowa
- Effective Date: January 1, 2019
- Threshold: $100,000 in annual gross sales.
- Considerations: Factors in various transactions including exempt and taxable sales, sales intended for resale, exempt sales, specific electronic transactions, and gross sales revenue of tangible personal property.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Kansas
- Effective Date: October 1, 2019
- Threshold: $100,000 in gross sales within the state.
- Considerations: Encompasses a variety of sales including tangible personal property, digital products, and taxable services delivered within the state.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Kentucky
- Effective Date: October 1, 2018
- Threshold: $100,000 in gross sales or 200 or more annual transactions.
- Considerations: Includes digital property transmitted electronically, exempt sales, and gross sales receipts from tangible personal property.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Louisiana
- Effective Date: July 1, 2020
- Threshold: $100,000 in gross sales or 200 or more transactions within the state in the previous or current calendar year.
- Considerations: Encompasses a broad range of sales including tangible personal property, digital products, and taxable services delivered within the state.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Maine
- Effective Date: July 1, 2018
- Threshold: $100,000 in gross sales or 200 or more annual transactions.
- Considerations: Includes taxable delivered services, exempt sales, and gross sales of tangible personal property.
- Marketplace Facilitator Exclusion: Transactions of exempt services are excluded from economic nexus determination.
Maryland
- Effective Date: October 1, 2018
- Threshold: $100,000 in gross sales or 200 annual transactions.
- Considerations: Included transactions are taxable services, exempt digital goods sales, exempt software sales, exempt personal property sales, digital delivered goods, software sold and delivered, and revenue from tangible personal property sales.
- Marketplace Facilitator Exclusion: Exempt services are the only excluded transactions from economic nexus determination.
Massachusetts
- Effective Date: October 1, 2017
- Threshold: $100,000 in sales or 100 or more transactions in the previous calendar year.
- Considerations: Includes taxable and exempt sales of tangible personal property, software, services, and digital goods.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Michigan
- Effective Date: October 1, 2018
- Threshold: $100,000 in gross receipts.
- Considerations: Encompasses receipts from sales of tangible personal property, digital goods, and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Minnesota
- Effective Date: October 1, 2018
- Threshold: $100,000 in sales or 200 or more retail sales shipped to the state in the current or previous calendar year.
- Considerations: Includes taxable and exempt sales of tangible personal property, digital goods, and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Mississippi
- Effective Date: December 1, 2017
- Threshold: $250,000 in sales for the previous 12 months.
- Considerations: Includes sales of tangible personal property, digital goods, and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Missouri
- Effective Date: October 1, 2019
- Threshold: $100,000 in sales in the previous calendar year.
- Considerations: Encompasses sales of tangible personal property, digital goods, and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Montana
- No Economic Nexus Law: Montana does not impose economic nexus requirements for remote sellers.
Nebraska
- Effective Date: January 1, 2019
- Threshold: $100,000 in sales or 200 or more separate transactions.
- Considerations: Includes sales of tangible personal property, digital goods, and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Nevada
- Effective Date: November 1, 2018
- Threshold: $100,000 in gross revenue from retail sales.
- Considerations: Includes sales of tangible personal property, digital goods, and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
New Hampshire
- No Sales Tax: New Hampshire does not impose sales tax; therefore, there are no economic nexus requirements.
New Jersey
- Effective Date: November 1, 2018
- Threshold: $100,000 in sales or 200 or more transactions in the current or previous calendar year.
- Considerations: Encompasses sales of tangible personal property, digital goods, and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
New Mexico
- Effective Date: July 1, 2019
- Threshold: $100,000 in taxable sales in the previous calendar year.
- Considerations: Includes sales from real property services, licenses, digital products, and Software as a Service (SaaS).
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
New York
- Effective Date: June 21, 2018
- Threshold: $500,000 in gross sales of tangible personal property (TPP) and 100 or more transactions in the previous four quarters.
- Considerations: Includes retail sales of nontaxable property, sales of SaaS, and other tangible personal property.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
North Carolina
- Effective Date: November 1, 2018
- Threshold: $100,000 in sales or 200 or more transactions in the current or previous calendar year.
- Considerations: Includes gross sales sourced to the state and property/service sales prices.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
North Dakota
- Effective Date: October 1, 2018
- Threshold: $100,000 in taxable sales within a year.
- Considerations: Includes gross sales of taxable services and taxable property.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Ohio
- Effective Date: January 1, 2018
- Threshold: $100,000 in gross sales or 200 or more annual transactions.
- Considerations: Encompasses exempt sales, services for the benefit of the state, and gross receipts from tangible personal property sales.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Oklahoma
- Effective Date: July 1, 2018
- Threshold: $100,000 in gross sales within the current or previous year.
- Considerations: Includes the aggregate sale of taxable tangible personal property.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Oregon
- No Sales Tax: Oregon does not impose sales tax; therefore, there are no economic nexus requirements.
Pennsylvania
- Effective Date: July 1, 2019
- Threshold: $100,000 in sales in a year.
- Considerations: Encompasses gross sales of products and services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Rhode Island
- Effective Date: August 17, 2017
- Threshold: $100,000 in gross sales or 200 or more annual transactions.
- Considerations: Includes prewritten computer software provided through electronic means, gross sales revenue of tangible personal property, certain digital products, and taxable services delivered.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
South Carolina
- Effective Date: November 1, 2018
- Threshold: $100,000 of yearly gross sales.
- Considerations: Includes gross revenue resulting from the sale of tangible personal property, products transferred electronically, and exempt sales and services rendered within the state.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
South Dakota
- Effective Date: November 1, 2018
- Threshold: $100,000 of gross annual sales.
- Considerations: Includes exempt sales, rendered services, products transferred electronically, and gross sales revenue from tangible personal property.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Tennessee
- Effective Date: October 1, 2019
- Threshold: $100,000 in retail sales in the previous 12 months.
- Considerations: Encompasses exempt and taxable services, exempt sales, and sales made to customers.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Texas
- Effective Date: Determined by the first day of the fourth month after surpassing the threshold or October 1, 2019
- Threshold: $500,000 of gross sales in the previous 12 months.
- Considerations: Includes exempt sales, exempt services, gross revenue from the sale of services and personal property within the state.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Utah
- Effective Date: January 1, 2019
- Threshold: $100,000 of gross sales or 200 annual transactions.
- Considerations: Encompasses products electronically transferred into Utah, gross revenue from tangible personal property/services sales into the state, exempt sales, and taxable/exempt services rendered within the state.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Vermont
- Effective Date: July 1, 2018
- Threshold: $100,000 of gross sales or 200 transactions in the prior four calendar quarters.
- Considerations: Includes services (exempt and taxable) within the state, the sales of tangible personal property/services to the state, and electronically transferred products.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Virginia
- Effective Date: July 1, 2019
- Threshold: 200 or more yearly transactions or $100,000 of retail sales.
- Considerations: Include taxable services, exempt sales, products transferred electronically, and all sales of tangible personal property.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Washington
- Effective Date: January 1, 2018 (for businesses exceeding 200 transactions or $100,000 of gross sales), and July 1, 2017 for the B&O tax requirement.
- Threshold: 200 transactions or $100,000 of gross sales.
- Considerations: Encompasses cumulative gross yearly income, exempt sales, exempt sales for resale, and taxable services.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Washington D.C.
- Effective Date: January 1, 2019
- Threshold: Gross revenue surpassing $100,000 or engaging in 200 or more separate transactions in the preceding or ongoing year.
- Considerations: Include sales tax submission obligations for companies exceeding the thresholds.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
West Virginia
- Effective Date: January 1, 2019
- Threshold: 200 or more annual transactions or $100,000 in gross sales.
- Considerations: Encompasses tangible personal property sales, exempt sales, taxable services, and electronically transferred products.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Wisconsin
- Effective Date: October 1, 2018
- Threshold: $100,000 in gross annual sales.
- Considerations: Includes exempt sales, yearly services gross sales, and yearly tangible property gross sales into the state.
- Marketplace Facilitator Exclusion: Not specified; additional details may be required to determine if marketplace facilitator sales are excluded from economic nexus calculation.
Frequently Asked Questions (FAQs) – Economic Nexus Policies
Q: What if my business operates in multiple states?
A: If your business operates in multiple states, you must monitor the economic nexus thresholds and registration requirements for each state individually. It’s essential to stay compliant with the regulations of each jurisdiction where you have economic nexus.
Q: Do I need to register for economic nexus if I only sell taxable services?
A: Yes, economic nexus applies to both tangible goods and taxable services in most states. However, specific rules may vary by state, so it’s crucial to review the regulations of each state where you conduct business.
Q: Can I use software to help manage economic nexus compliance?
A: Yes, there are various software solutions available to help businesses manage economic nexus compliance, including monitoring sales thresholds, calculating sales tax liabilities, and facilitating registration and filing processes. It’s advisable to choose a reputable software provider that offers features tailored to your business needs.
Q: What are the consequences of failing to comply with economic nexus regulations?
A: Failure to comply with economic nexus regulations can result in penalties, fines, and other enforcement actions imposed by state tax authorities. These consequences can vary depending on the state and the extent of non-compliance, but they may include back taxes, interest charges, and legal repercussions. It’s essential to prioritize compliance to avoid these potential risks.
Q: How can I ensure ongoing compliance with economic nexus regulations?
A: To ensure ongoing compliance with economic nexus regulations, businesses should regularly monitor their sales activities in each state where they have nexus, review relevant thresholds and requirements, maintain accurate records of sales transactions, and stay informed about changes to state tax laws. Additionally, seeking guidance from tax professionals or consultants can help navigate complex compliance issues and minimize the risk of non-compliance.
Mergers and Acquisitions: Considerations for Economic Nexus Compliance
Mergers and acquisitions (M&A) can significantly impact a company’s economic nexus footprint, potentially triggering new compliance obligations or altering existing ones. When undergoing M&A activity, it’s essential for businesses to carefully evaluate the implications for economic nexus and take proactive steps to ensure compliance with state tax laws. Here are some key considerations to keep in mind:
- Due Diligence: During the M&A due diligence process, it’s crucial to assess the target company’s sales activities and nexus footprint in various states. Understanding the target’s existing compliance status and potential exposure to economic nexus laws will help identify any areas of risk or opportunity.
- Nexus Analysis: Conduct a thorough nexus analysis to determine the impact of the M&A transaction on your company’s overall nexus profile. Consider factors such as the combined sales volume, customer base, and geographic reach of the merged entities to assess potential nexus thresholds in relevant states.
- Post-Merger Integration: Following the completion of an M&A transaction, integrate the newly acquired business into your existing operations while maintaining compliance with state tax laws. This may involve updating systems, processes, and documentation to reflect changes in nexus status or registration requirements.
- Contractual Obligations: Review any existing contracts, agreements, or arrangements that may have implications for economic nexus compliance post-merger. Ensure that contractual obligations related to sales tax collection, remittance, and reporting are properly addressed and fulfilled in accordance with applicable state laws.
- Tax Planning Strategies: Explore tax planning strategies to optimize your company’s nexus footprint and minimize potential tax liabilities in the wake of M&A activity. This may include restructuring sales channels, adjusting pricing strategies, or reallocating resources to strategically manage economic nexus exposure.
- Compliance Monitoring: Establish robust processes for monitoring economic nexus thresholds and compliance requirements on an ongoing basis, especially in the aftermath of M&A transactions. Stay informed about changes to state tax laws and regulations that may impact your business operations and adjust your compliance strategy accordingly.
By addressing these considerations proactively and incorporating economic nexus compliance into your M&A strategy, you can navigate the complexities of state tax regulations more effectively and mitigate the risk of non-compliance. Consult with tax professionals and legal advisors with expertise in M&A transactions to develop a comprehensive compliance plan tailored to your specific business needs and objectives.
Navigating economic nexus regulations can be complex and challenging for businesses of all sizes. However, by understanding the key concepts, staying informed about state-specific requirements, and leveraging available resources and technology solutions, businesses can effectively manage their compliance obligations and minimize the risk of penalties and other consequences. As economic nexus continues to evolve and expand across the United States, proactive compliance efforts are essential for maintaining a successful and sustainable business operation.
For further assistance with economic nexus compliance, sales tax automation, and other tax-related services, consider partnering with Boxelder Consulting. Our team of experienced professionals can provide personalized guidance and support to help your business navigate the complexities of state tax regulations and optimize your tax strategy for long-term success. Contact us today to learn more and take the next step toward achieving your business goals.
