Economic nexus is an encompassing term for how a state determines a connection between itself and a taxpayer, enabling them to impose a tax. Over the course of the last year, the guidelines of economic nexus have rapidly expanded in terms of where and how states can collect sales tax from out-of-state retailers in the United States.
In June 2018, the Supreme Court ruled in favor of the states in the South Dakota v. Wayfair, Inc. case. This case dramatically changed the sales tax landscape by overturning the very well-known 1992 case Quill v. North Dakota that held that retailers had to have a physical presence in a state in order to collect sales tax.Following the 2018 ruling, many states have already quickly chosen to adopt their own economic nexus rules and this trend is expected to continue.
Economic Nexus in Your State
Various states across the country have identical new economic nexus laws, while others have much different thresholds or are still in the process of enacting new laws.
South Dakota, as well as California, New Jersey and others enacted “bright-line tests” that state that retailers have economic nexus if annual sales are over $100,000 or if 200 separate transactions have occurred in the state. In Massachusetts, economic nexus is met if annual sales are over $500,000 and if 100 separate transactions are delivered to the state. Connecticut’s new economic nexus laws provide a minimum of $250,000 in sales and 200 or more separate transactions in order to collect sales tax from those retailers.
While many states have revised their economic nexus laws, other states such as New York and Texas have yet to release guidance on this subject.
It is important to note that the types of transactions included in the economic nexus calculations vary from state to state. For example, while Maryland includes tangible personal property and taxable services for delivery in Maryland, South Dakota also includes products delivered electronically in the state.
What are the next steps?
Depending on the state in which a retailer has economic nexus, there may be additional guidelines a company needs to comply with. Most likely that entails registering with the state as soon as possible. Please be sure to contact us for further guidance on deciding how these new tax requirements may apply to you.
Written by: Haley Bean