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Small Seller Exceptions for Online Sales Tax

(posted: October 31st, 2018)

Laptop showing online shopping, related to online sales taxIn an earlier post we talked about the new sales tax rules for selling online, and how they might impact smaller businesses in particular. In this post we will expand on that with discussion about "economic nexus".

Nexus is the concept of having a taxable connection or presence in a jurisdiction. Economic nexus means having a connection that is not necessarily physical, but is instead reliant enough on a local economy to warrant a taxing obligation.

In this case, "economic nexus" imposes a sales and use tax collection obligation on remote sellers based only on their economic activity in a state. Nearly 30 states have adopted economic nexus since the U.S. Supreme Court ruled physical presence in a state is no longer the sole requisite for sales tax collection (South Dakota v. Wayfair, Inc., June 21, 2018), and all provide an exception for small sellers. The problem is, these exceptions are not all the same.

To determine how much business a remote seller is doing in a state, economic nexus laws rely on the volume of sales, the number of transactions, or both. For example, the South Dakota law that led to the demise of the physical presence rule uses the following thresholds: $100,000 in gross sales or 200 or more transactions of property, electronically delivered goods, or services delivered into the state in the current or previous calendar year.

Approximately 20 states with economic nexus share the $100,000 in sales/200 transactions threshold (though not all include the same transactions in the test): Remote sellers that have less than $100,000 in sales or fewer than 200 transactions in the state don't have to collect and remit sales or use tax in the state. Those with more than $100,000 in sales or at least 200 transactions must.

Seems simple enough, and for a business that sells only in its home state and South Dakota, it probably is. However, it gets more complicated for businesses with customers in multiple economic nexus states. And it will become yet more complicated when other state economic nexus policies go into effect later this year and in early 2019.

Different Small Seller Exceptions

Though most economic nexus states closely follow South Dakota's example, several have adopted different thresholds.

In Alabama, for example, a remote seller must do more than $250,000 in sales in the state and engage in certain activities (e.g., solicitation) to trigger economic nexus. In Connecticut, the threshold is at least $250,000 in revenue and 200 or more retail sales into the state and systematic solicitation in the state. In Minnesota, the economic nexus threshold is 10 or more sales totaling $100,000 or 100 or more retail sales. And so on.

There are even differences among states with South Dakota–style economic nexus thresholds. A remote seller must have $100,000 or more (or 200 transactions) to trigger economic nexus in Colorado, while in Indiana, a remote seller must have more than $100,000 (or 200 transactions). The likelihood of a business meeting or missing the threshold by mere pennies seems slim, but still, a difference is a difference.

Then there's West Virginia, one of the latest states to adopt economic nexus. Like most other states, it relies on the $100,000/200 transactions thresholds to determine whether an out-of-state seller has established an obligation to collect and remit West Virginia sales and use tax.

However, the tax department website provides conflicting information. In multiple places on its website, West Virginia manages to state that both conditions must be met to trigger the tax obligation, and then again that either condition will trigger the tax obligation.

As you can see, this can become quite complex.

Types of Transactions Included in Thresholds

Another complicating factor is that different states include different transactions in the threshold. For example, thresholds in the states below are based on the following:

  • Connecticut: retail sales of products
  • Maine: taxable and nontaxable products, services, and electronically delivered products
  • Mississippi, Nevada, and Vermont: sales into the state
  • West Virginia: taxable and nontaxable products and services

Such differences make determining the threshold in multiple states extremely challenging. States are striving to make their economic nexus laws clear, but these are new laws, and it will likely take time to sort out all the kinks.

Please contact us for further assistance with your online state sales tax questions.

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