It has been almost two years since the United States Supreme Court ruled 5-4 in South Dakota vs. Wayfair that states can require the collection and remission of sales tax without physical presence nexus. If you and your business have not yet educated yourself on the new requirements, now is a good time to do so.

As a starter, we should briefly discuss nexus. Nexus is the connection between a business and a particular state sufficient to necessitate a tax filing.

The Wayfair decision significantly lowers the sales and use tax nexus bar, allowing states to require that a business with sales of $100,000 or more in the state collect and remit sales tax. It also set a 200-transaction minimum whereby a business with 200 or more separate transactions within a state during a tax year is required to collect and remit sales tax even though their sales are less than $100,000 in the state.

States are not required to use these minimum “economic nexus” standards, although as of the date of this article most of the state have adopted these levels. Some states have adopted higher thresholds; California currently has adopted a $500,000 minimum threshold.

What else do you need to know?

  • Most states use the previous or current calendar year for the measurement period. Meaning if you exceed the revenue or transaction limitation during the prior or current calendar year you have nexus for sales and use tax purposes.
  • In most cases, even exempt sales count towards the threshold requirements.
  • States have adopted this new nexus standard ranging in dates from July 1, 2018 to January 1, 2020.
  • Due to the relative newness of these standards, states are still changing their requirements.

Why review this issue? States have a certain amount of time to review and assess sales and use tax.  This time period (i.e. Statute of Limitations) never begins if a business doesn’t file a return. For example, let’s say you start a business in 2021 and have sales tax nexus in South Dakota. Even though the business has nexus, a decision has been made not to file returns. In 2028 the business receives a visit from the South Dakota Department of Revenue (SDOR). The SDOR assesses taxes (and penalties and interest) all the way back to 2021.

What should you do? When gathering your year-end documents run a report of the business sales for each state, by state of destination. You can use this report to identify states where you may have an issue. You can use the attached excel spreadsheet which has been updated for the most recent information to help. The “Number of Transactions” and “Prior Year Sales” columns are interactive. If you add your data for each state, you will find out if you meet the number of transaction or sales dollar nexus thresholds. Please note that we have made it a practice to update this spreadsheet periodically as states update their requirements.

You are not quite done. Physical presence nexus for sales and use tax still exists. Therefore, even if you don’t meet the economic nexus standards you could still have nexus if you have employees or property in a state.

As always please contact your representative at LB Carlson for further assistance.