You may or may not be familiar with the term “sales tax nexus” as defined in the Quill v. North Dakota Supreme Court case. Long story short: retailers must have some kind of presence in a state before that state can require that retailer to collect sales tax from buyers in that state.
However, with the Supreme Court ruling in the South Dakota v. Wayfair case, the precedent set by Quill has now been overturned. Now, not only does physical presence (such as a location, employee or inventory), but “economic” presence in a state creates sales tax nexus.
In other words, due to the Wayfair ruling, even if you do not have a physical presence in a state, if you pass a state’s economic threshold for total revenue or number of transactions in that state, you’re legally obligated to collect and remit sales tax to that state.
This post will explain the state of “economic nexus” and discuss what online sellers need to know.
What are economic nexus laws?
To combat what they see as an unfair precedent set by Quill, some states prematurely passed laws that read something like, “If an online seller, even though they don’t have a presence in our state, makes more than $X in sales in our state, or conducts more than X number of transactions in our state, then they are required to collect sales tax from buyers in our state.”
These laws were knowingly contrary to Supreme Court precedent. But after the Supreme Court ruling in South Dakota v. Wayfair, states are now free to enforce these laws on businesses.
State laws on economic nexus vary. The sales thresholds vary from $10,000 to $500,000 in sales, and some states don’t have a transaction threshold at all.
How did we get here?
Ohio was the first state to float the idea of economic nexus. Way back in 2005, they passed a “Commercial Activity Tax” (CAT) law. This law stated that any retailer who makes more than $500,000 in sales in Ohio is subject to Ohio’s sales tax collection laws. And that was it – there was no need for that retailer to have an employee, location, inventory, etc. in the state. All they had to do to be subject to the law was make over $500,000 in sales to Ohio buyers.
From there, other states began to follow suit and pass similar laws. It’s probably no surprise that many of these laws were aimed at eCommerce giants like Amazon, which until 2020 was not collecting sales tax in all U.S. states. Amazon finally buckled and began collecting sales tax from buyers in every U.S. state, but states are still hungry for tax revenue and continue to attempt to enforce these laws on other retailers.
Are economic nexus laws even legal?
In short, the answer to that is “Yes.” South Dakota passed a particularly aggressive economic nexus law, and the Supreme Court heard the case dealing with this issue this year.
South Dakota Senate Bill 106 stated that any retailer with sales into South Dakota exceeding $100,000 was required to collect and remit South Dakota sales tax. Then they took it a step further by sending out notices of lawsuit to four vendors who they felt met this threshold but were not collecting sales tax: Newegg, Overstock.com, Systemax and Wayfair. Newegg, Overstock.com and Wayfair all fought back through the courts, and the Supreme Court ruled in favor of South Dakota.
Since this ruling has happened, states’ economic nexus laws are now allowed to stand, and some online sellers will be required to collect sales tax in more states than before.
What do economic nexus laws mean for online sellers?
Online sellers who did not have the means or the will to fight in court have capitulated and started collecting sales tax from buyers in states with sales tax nexus laws. Other online sellers, banking that these laws wouldn’t stand up in court against the Quill precedent, took a wait-and-see approach and will make a decision regarding sales tax collection after South Dakota v. Wayfair. Now that decision has been made.
Since the Quill physical presence requirement is overturned, states are free to pursue sales tax from online retailers who exceed the thresholds as stated in their economic nexus laws. However, there’s also a chance that Congress could step in and pass a law regulating sales tax. Right now, we live in a sales tax Wild West.
If you meet economic nexus thresholds in some states, we recommend speaking with a sale tax expert to determine your best course of action.
How are economic nexus laws different from notice and report laws?
“Notice and report” laws are state laws that require online sellers with no physical presence in a state to either collect sales tax or provide a significant amount of reporting to states and their buyers if they meet a certain revenue or transaction threshold. While these sound similar to economic nexus laws, they are slightly different.
The biggest difference between economic nexus laws and notice and report laws are that notice and report laws have been legally in effect starting July 1, 2017, starting with the state of Colorado’s notice and report law. Economic nexus laws were not declared Constitutional until June 21, 2018 when SCOTUS handed down their decision in South Dakota v. Wayfair.
As a seller, this could make a big difference to you if have not been sales tax compliant. For example, as of right now, no states have attempted to apply economic nexus sales tax laws to online sellers retroactively. So if you are just now learning about economic nexus, you do have time to become compliant. But if you have not been compliant in states with notice and report laws, you may want to consult a sales tax expert on how to mitigate any damage since these laws have been in effect for several months at this point.
Economic Nexus Laws, by State
Important to note: This area of law is changing rapidly. Taxjar (among other sales tax services) maintains a list of the economic nexus requires by state. That list is free to access, but if you are approaching the nexus requirements for any state, it is highly recommended that you consult a sales tax professional.
Tax Jar: Economic Nexus by State