In 2023, a survey of 1,000 U.S. and U.K. businesses revealed that 72% of thesebusinesses found sales tax requirements for online sellers “complex and confusing.” 1Further, only approximately 60% of businesses felt that they were compliant with alleconomic nexus requirements, meaning nearly half believed that they were not meetingall of their sales tax obligations as an online seller. 2

Economic nexus laws as an online retailer can be difficult to navigate. Let’s walkthrough the process step-by-step, starting with a basic understanding of economicnexus.

Economic Nexus Background

In earlier blog posts, we addressed different channels through which your businessmight have “nexus” in another state. “Nexus” is the connection between your businessand another state that allows that state to require you to charge and remit sales tax.Prior to the 2018 Supreme Court case South Dakota v. Wayfair, businesses had to havea physical presence, like an office building or employees, in the state in order for salestax laws to apply. 3 This case overturned the physical presence requirement, allowingstates to impose sales tax requirements on businesses without a physical presence inthat state.

With the physical presence requirement gone, states were quick to enact economicnexus laws. Economic nexus laws can require sellers with no physical presence in astate to collect and remit sales tax when the sellers cross a certain threshold in sales,transactions, or both. However, there was no uniform requirement set forth for thesethresholds, meaning each state has the ability to impose a different threshold. Evenfurther, some cities and counties within a state impose their own local sales tax, whichrequires additional compliance.

By now, you might be wondering how businesses could possibly keep up with everystate’s economic threshold requirements, and the truth is: it is becoming nearlyimpossible for businesses to navigate nexus on their own. Approximately 50% of theU.S. and U.K. businesses surveyed stated that they needed to increase their prices tokeep up with the costs of economic nexus compliance. Compliance includes research,sales tax software, various state registrations, monthly return filing, and more.

Economic Nexus Thresholds

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1 https://newsroom.avalara.com/2023-06-13-Avalara-Survey-Finds-2018-Wayfair-Decision-Adds-Costs-for-Consumers.
2 Id.
3 South Dakota v. Wayfair, 585 U.S. 1089 (2018).

We mentioned that there is no uniform requirement for the sales and transactionthresholds that a state imposes through its economic nexus laws. Luckily, most stateshave opted for a $100,000 sales transaction and/or a 200 transaction threshold. Somelarger states, like California and Texas, have a $500,000 transaction threshold. 4

The first step in navigating economic nexus is determining in which states your businessmay have crossed the economic nexus threshold. Simple, right? Seemingly, until youconsider the myriad of other factors that go into this determination. Is the salesthreshold based on gross sales or taxable sales? Do I include my wholesale sales andtransactions? Does the calculation reset at the end of the year, or do I track my salesand transactions on a rolling basis until I cross the threshold? Do I include my shippingcosts? These are all considerations that complicate an economic nexus analysis for theaverage business owner.

State Registrations

Once you determine that your business has crossed the economic nexus threshold inany given state, the compliance work has just begun. Crossing the economic nexusthreshold triggers a requirement for you, as an online seller, to register for a sales taxaccount with that state and start charging and remitting sales tax. It’s important that youtake action in that order; you must have an active sales tax registration to charge yourcustomers sales tax. Some states allow for a short grace period, usually 30 or 60 daysafter you cross the threshold, to register. But like most things sales tax-related, thisvaries by state.

Charging and Remitting the Correct Amount of Sales Tax

After you register your business for a sales tax license in a state, you can begincharging your customers sales tax. But how much sales tax do you charge?Determining the correct rate is difficult since sales tax rates vary by state, county, andcity. The state sets forth a state-wide sales tax rate, and the localities can imposeadditional surtaxes ranging from 0.25% to 3% or higher. For example, the NorthCarolina state sales tax rate is 4.75%. This means that all online sales shipped to afinal destination in North Carolina are subject to the state 4.75% rate. However, NorthCarolina also has over 100 taxing jurisdictions that impose local sales tax rates between0.25% and 2.25%. It is the seller’s responsibility to determine the appropriate rate andcharge customers accordingly. Understandably, determining the correct sales tax rate isno longer a one-person job, and under or over-collecting sales tax can have frustratingimplications.

Once you’ve charged your customers the correct amount of sales tax, you are stillresponsible for reporting that sales tax on the state return. Depending on the volume ofsales you have in a state, you may be required to file monthly, bi-monthly, quarterly,

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4 https://www.cdtfa.ca.gov/industry/wayfair.html; https://comptroller.texas.gov/taxes/sales/remote-sellers.php.

semi-annual, or annual returns. As an online seller, it is also your duty to make sure youare reporting the sales tax you collected to the appropriate localities. Remember allthose taxing jurisdictions we mentioned previously? Sales tax must be allocated andreported to each one. Texas, for example, has over 1,600 different taxing jurisdictions,while Indiana has only one. 5 New York has around 80, and Illinois has over 600. 6 Mostonline sellers with economic nexus in one or more states cannot spend the time ormoney associated with inputting sales to all of these jurisdictions manually.

What Does This Mean for Your Business?

In light of Wayfair and the ever-changing complexity of economic nexus, youraccounting team or CPA might not be fully equipped to ensure compliance with eachstate’s laws – by no fault of their own. State Tax Advisors can alleviate the confusion,stress, and burden of sales tax compliance. Let State Tax Advisors be the best at allthings sales tax, so you can focus on being the best at your business.

5 https://taxfoundation.org/wp-content/uploads/2020/10/Sales-Tax-Jurisdictions-FV-01.png.
6 Id.