Economic Nexus Clarified
Economic Nexus: Post-Wayfair
Remote sellers (out of state via Internet, mail order or telephone without a physical presence in that state) face greater sales tax challenges after the June 21, 2018, U.S. Supreme Court decision for South Dakota v. Wayfair which expands the scope of economic nexus. The landmark decision overturns the previous nexus ruling of physical presence established by Quill v. North Dakota in 1992. In short, if your company sells in other states without having a physical presence, you may have to register to avoid penalty and interest. Some states estimate an additional $20 million in revenue due to imposing sales tax as a result of this decision.
States establish their own sales thresholds (volume and transactions) for companies to meet, as well as dates by which the decision takes effect. As such, it is important for those affected to understand what this decision means for their business and why a proactive approach for state registration can safeguard against future exposures.
Currently States Fall Into Two Groups:
- Forty-Five states, plus the District of Columbia and Puerto Rico formally recognize economic nexus much like South Dakota and have replicated similar tenets post-Wayfair.
- Currently only one state does not have any formal ruling in regards to economic nexus or online sales. Missouri has not enacted legislation to formally recognize economic nexus. However, proposed legislation is slated to begin on January 1, 2023.
States have enacted new nexus rules for remote sellers since 2008, but the Wayfair decision is by far the most reaching in terms of impacting those sellers involved in e-commerce. Often called “remote seller nexus”, here is a brief description of each type imposed by states:
- Economic Nexus: Remote Seller has no physical presence; nexus is determined by sales volume or number of transactions.
- Click-Through Nexus: Remote Seller contracts with an in-state entity that refers potential Buyers via web link for consideration/commission upon sale.
- Affiliate Nexus: Affiliated entity of Remote Seller does have physical presence to necessitate nexus that requires Seller to collect and remit sales and use tax on taxable retail sales.
- Marketplace Nexus: Marketplace or Third-Party Reseller provides e-commerce infrastructure to become the facilitator of the sale, and therefore should be required to register and collect tax as the “Seller”.
The Wayfair decision creates a complicated nexus landscape for remote sellers as states enact their own provisions to increase revenue. TaxMatrix can help navigate the nexus conundrum by reviewing your sales, creating an exposure priority path and filing the necessary state registrations to save you time, along with future penalty and interest. Economic nexus will keep evolving, and TaxMatrix will always be one step ahead in keeping our clients current. Please see the following resources below for extra guidance:
Economic Exposure Analysis
All but one state has enacted economic nexus provisions, but since the Wayfair decision, the criteria to determine nexus keeps changing. Originally, gross sales and number of associated transactions for a given year was all that was needed to determine economic nexus. Given the unique landscape by which remote sellers operate, those two data points meant that many registrations would constitute little or no tax to remit. Thus, states are changing the criteria to constitute economic nexus.
Companies need a proactive approach to compliance before they can start collecting sales tax. The new criteria could ultimately mean only registering in a fraction of states. The Economic Nexus Exposure Analysis is an economic nexus study to determine which states registration is truly needed. We examine the following criteria:
- Sales Data Going Back to 2017
- Changing Thresholds in Gross Sales
- Changing Thresholds in # of
- Retail Sales
- Taxable Sales including Marketplace
- Taxable Sales excluding Marketplace