Economic nexus has become a critical concept for businesses selling goods or services across state lines, especially in the era of widespread e-commerce. It defines when a business lacking a physical location in a state must still collect and pay sales tax due to substantial economic activity in that state.
Background: From Physical Presence to Economic Nexus
Historically, states could only mandate sales tax collection if a business had a “physical nexus,” such as a store, warehouse, or employees within their borders. This was established by the 1992 U.S. Supreme Court ruling in Quill Corp. v. North Dakota. However, this standard became outdated as online sales grew, allowing businesses to sell into states without paying sales tax, disadvantaging local sellers.
The transformative 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. overturned the physical presence rule. The court ruled that states could require remote sellers to collect sales tax if they meet economic nexus thresholds based on sales revenue or transaction counts—meaning substantial remote sales alone establish tax obligations.
Understanding Economic Nexus Thresholds
Each state sets its own sales tax nexus thresholds, generally based on either:
- Sales Revenue: Total dollar amount of taxable sales into the state.
- Transaction Volume: Number of separate sales transactions.
A common standard is $100,000 in sales or 200 transactions within a calendar year, but thresholds vary. For instance, Texas primarily enforces a sales revenue threshold. These thresholds mean a business surpassing these figures within a state must register for a sales tax permit, collect tax, and file returns.
Who Must Comply?
Economic nexus obligations primarily impact:
- Remote Sellers and Online Businesses: Those without physical presence but with significant sales in a state.
- Marketplace Facilitators: Platforms like Amazon or eBay that facilitate third-party sales may be required to collect and remit sales tax if they meet nexus criteria, which can ease responsibilities for individual sellers.
- Small to Medium Businesses: Even smaller companies can meet these thresholds unexpectedly, so awareness is essential.
Compliance Strategies for Businesses
Navigating multi-state sales tax requires proactive management:
- Track sales and transactions per state using accounting tools or e-commerce platforms.
- Review individual state rules since thresholds and taxability vary.
- Register for sales tax permits early once thresholds are met to avoid penalties.
- Consider leveraging sales tax compliance software to automate tax calculations and filings. FinHelp’s glossary on sales tax covers software and tools.
- Consult tax professionals frequently to stay updated on changing laws.
Clarifying Common Misconceptions
- Economic nexus applies regardless of business size if thresholds are exceeded.
- Your home state’s lack of sales tax doesn’t exempt you from obligations in other states.
- Ignoring economic nexus duties exposes your business to fines and interest.
Economic Nexus vs. Physical Nexus
| Criterion | Physical Nexus | Economic Nexus |
|---|---|---|
| Basis | Tangible presence like stores or employees | Sales volume or transactions exceeding state-defined limits |
| Established by | Quill decision (1992) | South Dakota v. Wayfair decision (2018) |
| Affected Businesses | Those with physical presence | Remote sellers without physical presence |
For more context on nexus concepts, see our Nexus article and Wayfair Decision.
Frequently Asked Questions (FAQs)
Q: What if I don’t meet a state’s threshold?
A: You generally have no obligation to collect sales tax there but should continuously monitor sales for future compliance.
Q: What are marketplace facilitators?
A: These are online platforms that sell items for other businesses and may be required to collect and remit sales tax on their behalf if meeting nexus thresholds.
Q: Must I collect sales tax on services?
A: States vary widely; check specific state tax laws to determine whether services you provide are taxable.
Additional Resources
- IRS Overview of Sales Tax Obligations: IRS.gov
- Texas Comptroller guidance on remote sellers: Texas Sales Tax
This comprehensive understanding of economic nexus helps businesses remain compliant and avoid costly penalties while managing remote sales.
