More than 40 States Have Enacted Economic Nexus Legislation to Collect Online Sales Tax from Merchants without Physical Presence
Forty-two states plus the District of Columbia have laws in place, already in effect or scheduled to take effect soon, that increase the collection of online sales tax by defining an Economic Nexus or Sales Nexus based on the number of transactions and/or the dollar value of transactions made by consumers in a given state during the year.
In June 2018 the United States Supreme Court sided with South Dakota in a case against online retailer Wayfair and the state’s ability to collect online sales tax. Overturning two previous rulings around the ability to collect tax when a business does not have physical presence in a state, this ruling was controversial and closely contested, with five Supreme Court Justice’s ruling in favor of South Dakota versus four who did not. This was the first domino to fall, as this ruling led to many other states quickly drafting legislation of their own to define an Economic Nexus as the basis for collecting sales tax online.
Specifically, the Supreme Court ruled that it is constitutional for South Dakota to assess and collect online sales tax only for merchants who have considerable business in the state. South Dakota’s law set limits of 200 orders or $100,000 in sales to the state. Known as an Economic Nexus or a Sales Nexus, merchants with considerable business or sales to consumers within a given state that exceed their stated thresholds are required to charge and remit sales tax.
Many other states adopted similar legislation using the same exact thresholds set by South Dakota. Forty-two states and have similar Economic or Sales Nexus laws while twenty-seven of these states, as well as the District of Colombia, replicated South Dakota’s thresholds. Several states only have a dollar sales threshold and don’t look at the total number of orders, while several others have a higher dollar threshold than South Dakota. Tennessee and Texas, for example, require collection of online sales tax when a business has at least $500,000 in sales to their state, regardless of how many orders are processed. New York, on the other hand, lowered the transaction threshold to 100 orders but has a higher dollar threshold ($300,000) relative to the South Dakota standard.
Understanding when to assess online sales tax and how much that sales tax should be is complicated. Not only is there a patchwork of differing state laws, but within a state total sales costs often differ due to variances in county tax rates.
The Fraud Practice recently update their eCommerce Tax Implications training course to discuss the varying state legislations related to collecting sales tax online. This includes a list of all states which have either or both Click-Through Nexus and Economic Nexus tax legislation and what the individual state limits and thresholds are across the United States.
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